EXAM 1
Assets are
something of future economic value
What is the assumption regarding who pays freight?
The buyer does
What is going concern?
Company will be around long enough to use up assets and pay all liabilities
What is straight line depreciation?
Allocation of original cost evenly over the estimated life of the asset
What is the purpose of a for-profit, not-for-profit, and non-governmental entity?
To satisfy a customer demand
What is the market value of a company and where is it found?
Value paid by a willing buyer and a willing seller. Not found on the financial statements.
What is FIFO and what is LIFO?
First in first out, last in first out.
FIFO is LISH, last in still here inventory valuation
LIFO is FISH, first in here inventory valuation
What is Consistency?
Follow the same procedures each accounting period so you can compare financial statements
What is Accelerated depreciation?
Any depreciation method faster than straight line
Why does a for-profit company need to make a profit?
To reward the stockholders for taking an investment risk
What is a tax pass through and an example of one?
Taxes collected on behalf of a governmental entity and passed through to the entity.
Neither a revenue nor an expense.
May appear on the balance sheet as a liability if not yet paid.
EX: Sales tax, excise tax, employee payroll tax
What is Just In Time Inventory
Delivery of inventory just as its needed for production, but the trade off is you have reduced inventory levels vs stock out and additional costs expedited delivery
What is objectivity?
Arm's length negotiation
Where is straight line depreciation used and accelerated depreciation?
SL Depreciation is in the Income statement, "Per Books"
Acc. Depreciation is in the Tax Return, "Per Tax"
How can a company "make" money and not have any cash?
The company's books are on the accrual basis which follows transactions, but the Real World operates on the cash basis of cash in/cash out
What is the difference between depreciation, amortization, and depletion?
Depreciation: allocation of original costs over the estimated useful life of a tangible asset
Amortization: allocation of original costs over the estimated useful life of an intangible asset
Depletion: allocation of original costs over the estimated useful life of a natural resource asset
What is Freight Out?
Part of SG&A, sales and marketing expense of getting product to the customer. A deduction from gross profit on I/S
What is Full Disclosure?
Full monty, must disclose all relevant information
Who is the authority of straight line depreciation? Accelerated Depreciation?
GAAP and IRS respectively.
What is the difference between a for-profit entity and a not-for-profit entity?
1) Not-for-profit entity: pays no income taxes
For profit entity pays taxes and thereby subsidizes non-for-profit entities
2) For profit entity has stockholders
What is the difference between depreciation, amortization or depletion VS. accumulated depreciation, accumulated amortization, or accumulated depletion
Regular depreciation, amortization, or depletion is an expense for the period (on the I/S)
Accumulated are sums of the expense across ALL periods since the asset was placed in service (contra asset account on the B/S)
What is Freight In?
Part of inventory which is a current asset on B/S
Cost of getting materials to the plant or warehouse.
What is Conservatism?
If multiple options exist, pick the least favorable
What is the limit of straight line depreciation and accelerated depreciation?
TOTAL depreciation over the life of the asset PER BOOKS and PER TAX will be the SAME!
Who pays the corporation or business entity income taxes?
The customer pays the taxes. Revenue must cover all expenses which include taxes.