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54 Cards in this Set

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Sustainable income is equal to net income.
False
When irregular items are removed from the computation of net income, the result equals sustainable income.
Which amount is calculated when net income is adjusted for irregular items?
Sustainable income
Net income adjusted for irregular items is called sustainable income.
Sustainable income differs from net income because of which of the following items?
Gains and losses, and irregular revenues and irregular expenses
Gains, losses, irregular revenues, and irregular expenses all cause differences between net income and sustainable income.
A corporation shows income from continuing operations of $175,000. It has an extraordinary gain (pretax) of $50,000 and its tax rate is 30%. How much is the corporation’s net income?
$210,000
Income from continuing operations includes the income tax effect of continuing operations. The tax effect must be removed from irregular items. To remove the tax effect of the extraordinary gain: $50,000 – ($50,000 × 30%) = $35,000. The $35,000 is added to income from continuing operations of $175,000 to arrive at $210,000 net income.
Which of the following is not an irregular item on the income statement?
Other revenues and expenses
How are irregular items reported on the income statement?
In a separate section below income from sustainable operations
the separation helps users understand which part of income is sustainable and which part will likely not continue in the future.
Which of the following is considered a disposal of a significant component of a business?
Elimination of a major class of customers
The elimination of a major class of customers is a disposal of a significant component.
Where are extraordinary items reported on the income statement?
Immediately after discontinued operations
The established format of the income statement requires that extraordinary items be reported immediately after discontinued operations.
Which of the following is not considered to be an extraordinary item?
Losses attributable to a labor strike
Losses from a labor strike are not extraordinary because they are not unusual in nature.
Sudley Shoppe had severe damage done to its Christmas inventory due to an escaped circus elephant rampaging through the store. The inventory loss was $80,000 before applicable taxes of $20,000. How should Sudley Shoppe report the loss?
$60,000 extraordinary loss
Escaping elephants damaging the shop will be classified as an extraordinary event because it is both unusual and infrequent in nature. The item is reported net of income taxes: $80,000 - $20,000 = $60,000.
In reporting discontinued operations, which of the following should be shown in a separate section of the income statement?
Gains and losses from the operations of a
Gains on the disposal of the discontinued business segment
discontinued segment and gains and losses on the disposal of the discontinued segment are shown in a separate section immediately after continuing operations.
Cool Stools Corporation has income before taxes of $400,000 and a pretax extraordinary loss of $100,000. If the income tax rate is 25%, the income statement should show income before irregular items and extraordinary items, respectively, of
300,000 and $75,000
Income before irregular items is income before taxes minus income tax expense: $400,000 – ($400,000 × 25%) = $300,000. Extraordinary item: $100,000 – ($100,000 × 25%) = $75,000.
Which of the following is considered an “Other comprehensive income” item?
Unrealized loss on available-for-sale securities
Unrealized gains and losses on available-for-sale securities are part of other comprehensive income.
According to the FASB, what is added to or subtracted from net income to determine comprehensive income?
All changes in stockholders’ equity except changes resulting from transactions with stockholders
The FASB requires companies to report not only net income, but to include all changes in stockholders’ equity except those changes resulting from investments by stockholders and distributions to stockholders as comprehensive income.
Which of the following is income that includes all changes in stockholders' equity during a period except those resulting from investments by stockholders and distributions to stockholders?
Comprehensive income
Income that includes all changes in stockholders' equity during a period except those resulting from investments by stockholders and distributions to stockholders is called comprehensive income.
A company has net income of $200,000. Its portfolio of available-for-sale securities has a cost of $50,000 and a market value at the end of its accounting period of $54,000. How much is the company’s comprehensive income?
$204,000
The unrealized gain is calculated by taking the difference between cost and market for the securities: $54,000 market value – $50,000 cost = $4,000 gain. The gain is added to net income of $200,000 to arrive at comprehensive income.
Horizontal analysis is a technique for evaluating and comparing several companies at one time.
false Horizontal analysis examines one company over a period of time.
Total current liabilities are $10,000 in 2012, $18,000 in 2013, and $22,000 in 2014. What is the percentage increase from 2012 to 2014?
120%
The difference ($22,000 – $10,000) of $12,000 is divided by the base year of $10,000 to result in 120%.
Assume the following cost of goods sold data for a company:

2014 1,500,000
2013 1,200,000
2012 900,000

If 2012 is the base year, what is the percentage increase in cost of goods sold from 2012 to 2014?
66.7%
The change between 2012 and 2014 is divided by the base year (2012) to result in the percentage change: ($1,500,000 - $900,000)/$900,000 = 66.67%.
Assume the following cost of goods sold data for a company:
2014 1,600,000
2013 1,500,000
2012 1,200,000

If 2012 is the base year, what is the percentage increase in cost of goods sold from 2012 to 2014?
33.3%
The change between 2012 and 2014 is divided by the base year (2012) to result in the percentage change. ($1,600,000 - $1,200,000)/$1,200,000 = 33.3%.
In horizontal analysis of a balance sheet, of what amount is each item expressed as a percentage?
Base-year amount
he purpose of horizontal analysis is to determine the increase or decrease that has taken place compared to previous periods. Each item is expressed as a percentage of the base-year amount.
Adams Corporation reported net sales of $300,000, $330,000, and $360,000 in the years 2012, 2013, and 2014, respectively. If 2012 is the base year, what percentage do 2014 sales represent of the base?
120%
The percentage for 2014 is computed by dividing the 2014 net sales by the 2012 net sales or $360,000/$300,000 = 120%.
Vertical analysis is a technique for evaluating financial statement data by expressing each item in a financial statement as a percent of a base amount in that statement.
True
The following schedule is a display of what type of analysis?

Amount Percent
Current assets $200,000 25%
Property, plant, and equipment 600,000 75%
Total assets $800,000 100%
Vertical analysis
The schedule is a display of vertical analysis, in which the financial statement items are presented as a percentage of a base amount, in this case total assets.
In vertical analysis, what is the base amount for depreciation expense?
Net sales
When employing vertical analysis, all income statement items, including depreciation expense, use net sales as the base amount.
Ceradyne, Inc. presented the following data for a company:

Current liabilities $360
Long-term debt 480
Common stock 640
Retained earnings 520
Total liabilities & stockholders’ equity $2,000

How would common stock appear on a common size balance sheet using vertical analysis?
32.0%
Vertical analysis is a technique for evaluating financial statement data by expressing each item in a financial statement as a percent of a base amount in that statement:
$640/$2,000 = 32%.
Consider the following data for Soledad Corporation:

Cash $30,000
Accounts receivable 125,000
Inventory 200,000
Prepaid assets 20,000
Total current assets $375,000


Performing vertical analysis and using total current assets as the base, what percentage of total current assets is inventory?
53.3%\
Vertical analysis is a technique for evaluating financial statement data by expressing each item in a financial statement as a percent of a base amount in that statement. $200,000/$375,000 = 53.3%.
Given the following data for a company:

Sales Revenue $36,000
Cost of goods sold 24,080
Gross profit 11,920
Operating expenses 7,120
Net income $4,800

How would cost of goods sold appear on a common size income statement?
66.9%
Vertical analysis is a technique for evaluating financial statement data by expressing each item in a financial statement as a percent of a base amount in that statement. $24,080/$36,000 = 66.9%
Solvency ratios measure a company’s ability to pay its currently maturing obligations.
True Solvency ratios give an indication of the company’s ability to survive over a long period of time.
Profitability ratios provide information about a firm’s success in generating income from operations.
True his is an accurate description of the information provided by profitability ratios.
Using the following information:

Current assets $150,000
Total assets 500,000
Current liabilities 125,000
Total liabilities 200,000
Net credit sales 600,000
Cost of goods sold 160,000
Average receivables 50,000
Average inventory 40,000

How much is the accounts receivables turnover ?
12 times
The accounts receivables turnover is net credit sales divided by average net receivables: $600,000/$50,000 = 12 times.
Who is most interested in a company’s solvency?
Long-term creditors
Long-term creditors are most interested in knowing if debt is in jeopardy. Solvency represents an indication of the ability of the firm to survive over a long time period.
Who is most interested in a company’s current ratio?
Short-term creditors
The current ratio provides an indication of the ability of the firm to pay its current obligations as they become due. Short-term creditors are more interested in assessing liquidity.
The following information is available for Barkley Company:

2014 2013
Accounts receivable $ 360,000 $400,000
Inventory 280,000 320,000
Net credit sales 3,000,000 1,400,000
Cost of goods sold 1,200,000 1,060,000
Net income 300,000 170,000

How much is the accounts receivables turnover for 2014?
7.9 times
Accounts receivables turnover is net credit sales divided by the average net receivables: $3,000,000/[($360,000 + $400,000) / 2] = 7.9 times.
The following information is available for Barkley Company:

2014 2013
Accounts receivable $ 360,000 $400,000
Inventory 280,000 320,000
Net credit sales 3,000,000 1,400,000
Cost of goods sold 1,200,000 1,060,000
Net income 300,000 170,000

How much is the inventory turnover for 2014
4.0 times
Inventory turnover is cost of goods sold divided by average inventory and is a measure of liquidity: $1,200,000/[($280,000 + $320,000) / 2] = 4 times.
The following amounts were taken from the financial statements of Smiley & Smiley Gifts:

2014 2013
Current liabilities $280,000 $220,000
Long-term liabilities 800,000 600,000
Interest expense 100,000 50,000
Income tax expense 120,000 58,000
Net income 300,000 170,000
Net cash provided by operating activities 480,000 270,000

How much is the times interest earned for 2014
5.2 times
The formula for the times interest earned is the sum of net income plus interest expense plus income tax expense divided by interest expense. This is a measure of solvency.
($300,000 + $100,000 + $120,000)/$100,000 = 5.2 times.
The following amounts were taken from the financial statements of Smiley & Smiley Gifts:

2014 2013
Current liabilities $280,000 $220,000
Long-term liabilities 800,000 600,000
Interest expense 100,000 50,000
Income tax expense 120,000 58,000
Net income 300,000 170,000
Net cash provided by operating activities 480,000 270,000

How much is the cash debt coverage for 2014?
50.5%
The formula for cash debt coverage is cash provided by operations divided by average total liabilities: $480,000/[($280,000 + $800,000 + $220,000 + $600,000) / 2] = 50.5%. This is a measure of solvency.
The following amounts were taken from the financial statements of Nicklaus Company:

2014 2013
Total assets $800,000 $1,000,000
Net sales 720,000 650, 000
Gross profit 352,000 320,000
Net income 144,000 117,000
Weighted average number of common shares outstanding 120,000 120,000
Market price of common stock $36 $40

How much is return on assets for 2014?
16%
The formula for the return on assets is net income divided by average total assets. This is a measure of profitability: $144,000/[($800,000 + $1,000,000)/2] = 16%.
The following amounts were taken from the financial statements of Nicklaus Company:

2014 2013
Total assets $800,000 $1,000,000
Net sales 720,000 650, 000
Gross profit 352,000 320,000
Net income 144,000 117,000
Weighted average number of common shares outstanding 120,000 120,000
Market price of common stock $36 $40

How much profit did Nicklaus Company generate out of each dollar of sales during 2014?
20 cents or 20%
This is measured by profit margin which is net income, divided by net sales: $144,000/$720,000 = 20 cents.
Which measure(s) is (are) an evaluation of a company’s ability to pay current liabilities?
Both current ratio and current cash debt coverage
The current cash coverage and the current ratio are measures that can be used to evaluate a firm’s ability to pay current liabilities.
Which measure(s) is (are) useful in evaluating the efficiency in managing inventories?
Both inventory turnover and days in inventory
the inventory turnover and days in inventory are both useful measures in evaluating a firm’s efficiency in managing its inventories.
Which of the following is not a liquidity ratio?
Asset turnover
Asset turnover is a measure of profitability.
Plano Corporation reported net income $24,000; net sales $400,000; and average assets of $600,000 for 2014. What is the 2014 profit margin?
6%
Profit margin is computed by dividing net income by net sales: $24,000/$400,000 = 6%.
Use the following financial statement information as of the end of each year to answer this question.

2014 2013
Inventory $54,000 $48,000
Current assets 81,000 106,000
Total assets 392,000 336,000
Current liabilities 27,000 36,000
Total liabilities 102,000 88,000
Stockholders’ equity 290,000 248,000
Net sales 784,000 697,000
Cost of goods sold 306,000 277,000
Net income 34,000 90,000
Tax expense 22,000 18,000
Interest expense 12,000 12,000
Dividends paid to preferred stockholders 2,000 2,000
Dividends paid to common shareholders 1,000 1,000

Compute days in inventory for 2014.
60.8 days
Days in inventory equal 365 divided by the inventory turnover which is calculated by dividing the cost of goods sold by the average inventory:
365 ÷ [$306,000 ÷ (($54,000 + $48,000) ÷ 2)] = 60.8 days.
Use the following financial statement information as of the end of each year to answer this question.

2014 2013
Inventory $54,000 $48,000
Current assets 81,000 106,000
Total assets 392,000 336,000
Current liabilities 27,000 36,000
Total liabilities 102,000 88,000
Stockholders’ equity 290,000 248,000
Net sales 784,000 697,000
Cost of goods sold 306,000 277,000
Net income 34,000 90,000
Tax expense 22,000 18,000
Interest expense 12,000 12,000
Dividends paid to preferred stockholders 2,000 2,000
Dividends paid to common shareholders 1,000 1,000

Compute the current ratio for 2014.
3.0:1
he current ratio equals current assets divided by current liabilities: $81,000/$27,000 = 3.0:1.
Use the following financial statement information as of the end of each year to answer this question.

2014 2013
Inventory $54,000 $48,000
Current assets 81,000 106,000
Total assets 392,000 336,000
Current liabilities 27,000 36,000
Total liabilities 102,000 88,000
Stockholders’ equity 290,000 248,000
Net sales 784,000 697,000
Cost of goods sold 306,000 277,000
Net income 34,000 90,000
Tax expense 22,000 18,000
Interest expense 12,000 12,000
Dividends paid to preferred stockholders 2,000 2,000
Dividends paid to common shareholders 1,000 1,000

Compute the profit margin for 2014.
4.3%
Profit margin equals net income divided by net sales:
$34,000/$784,000 = 4.3%.
Use the following financial statement information as of the end of each year to answer this question.

2014 2013
Inventory $54,000 $48,000
Current assets 81,000 106,000
Total assets 392,000 336,000
Current liabilities 27,000 36,000
Total liabilities 102,000 88,000
Stockholders’ equity 290,000 248,000
Net sales 784,000 697,000
Cost of goods sold 306,000 277,000
Net income 34,000 90,000
Tax expense 22,000 18,000
Interest expense 12,000 12,000
Dividends paid to preferred stockholders 2,000 2,000
Dividends paid to common shareholders 1,000 1,000

Compute the return on common stockholders’ equity for 2014.
11.0%

The return on common stockholders’ equity equals the net income minus the dividends paid to preferred stockholders divided by the average common stockholders’ equity.
($34,000 - $2,000) ÷ (($280,000 + 238,000) ÷ 2) = 12.4%
Use the following financial statement information as of the end of each year to answer this question.

2014 2013
Inventory $54,000 $48,000
Current assets 81,000 106,000
Total assets 392,000 336,000
Current liabilities 27,000 36,000
Total liabilities 102,000 88,000
Stockholders’ equity 290,000 248,000
Net sales 784,000 697,000
Cost of goods sold 306,000 277,000
Net income 34,000 90,000
Tax expense 22,000 18,000
Interest expense 12,000 12,000
Dividends paid to preferred stockholders 2,000 2,000
Dividends paid to common shareholders 1,000 1,000

Compute the times interest earned for 2014.
5.7 times
Times interest earned is calculated by dividing the sum of the net income plus tax expense plus interest expense by the interest expense. ($34,000 + $22,000 + $12,000) ÷ $12,000 = 5.7 times.
The price-earnings ratio allows investors to make a meaningful evaluation of market values and earnings across firms.
True, This is a correct description of the use of the price-earnings ratio by investors.
Pro forma income includes unusual and nonrecurring items.
False;Pro forma income usually excludes items that the company thinks are unusual or nonrecurring.
Which situation below might indicate a company has a low quality of earnings?
Maintenance costs are capitalized and then depreciated
This suggest a company is trying to avoid expensing certain costs by deferring them to future accounting periods to increase current period income.
The following amounts were taken from the financial statements of Nicklaus Company:

2014 2013
Total assets $800,000 $1,000,000
Net sales 720,000 650, 000
Gross profit 352,000 320,000
Net income 144,000 117,000
Weighted average number of common shares outstanding 120,000 120,000
Market price of common stock $36 $40

How much is the price-earnings ratio for 2014?
30 times
The formula for the price-earnings ratio is the market price per share divided by earnings per share (net income divided by the average common shares outstanding). $36/($144,000/120,000) = 30 times.
Which of the following will most likely be provided by a high quality of earnings?
Full and transparent information
high quality of earnings provides full and transparent information that will not confuse or mislead the user of the financial statements
Which of the following is not a factor negatively affecting the quality of earnings?
Standardized accounting methods
Standardization of accounting methods is not a factor affecting quality of earnings. Instead, those factors that obscure full and transparent reporting, like alternative accounting methods, pro forma income, improper recognition, and PE ratios often limit earnings quality.