FINANCIAL ACCOUNTING TEST 11
COMPREHENSIVE TEST PAPER QUESTIONS
AND SOLUTIONS GRADED A+
◉ Capital Expenditures.
Answer: The cash flow related to the purchase of property and
equipment. Capital expenditures is part of the free cash flow
equation.
◉ Capitalization.
Answer: The practice of recording the cost of the purchase as an
asset, rather than recording it as an expense when an item is
purchased. For example, when a long-lived asset is purchased, such
as a machine, the cost of the machine is said to be capitalized
because it is recorded as an asset in the accounts. In contrast,
something small and immaterial, such as pens and pencils, may be
expensed immediately.
◉ Cash Accounting Method.
Answer: Under the cash accounting method, a business records
revenues and expenses only when cash is received or disbursed.
Although this method is used by some small, private businesses, it is
not an acceptable method under GAAP for publicly held companies.
,◉ Cash Conversion Cycle.
Answer: Cash conversion cycle is a measure of how long it takes a
business from the time it has to pay for inventory from its suppliers
until it collects cash from its customers. It can be calculated as the
Days Inventory, plus the Average Collection Period, minus the Days
Purchases Outstanding.
◉ Cash Equivalents.
Answer: Short-term, highly liquid investments that can be quickly
converted to cash.
◉ Chart of Accounts.
Answer: List of all of the accounts of a business. This list includes all
asset, liability, equity, revenue, and expense accounts. The accounts
and naming of accounts can vary from business to business.
◉ Circularity.
Answer: A problem with two variables in which the value of each
variable impacts the value of the other variable so that changing
either value impacts the other value.
◉ Common Size Financial Statements.
Answer: Common size financial statements divide each number on
the balance sheet by total assets, and each number in the income
statement by sales. This converts the financial statement items into
,ratios that help us see trends and can easily be compared from one
company to another.
◉ Common Stock.
Answer: The most typical stock or share type representing an
ownership interest in the business. Although there can be different
classes of common shares, owners of these shares usually have
certain rights including the right to share proportionately in the
profits of the business and the right to elect directors and vote on
proposals made by the directors to the shareholders.
◉ Conservatism.
Answer: This principle recognizes that there are some estimates
involved in accounting and says that accounting should reflect the
more cautious estimated valuation rather than the more optimistic
one. For assets it means recording the lower valuation while for
liabilities it means recording the higher possible valuation. For
revenues and gains it means recording them when they are
reasonably certain but for expenses and losses it means recording
them when they are reasonably possible.
◉ Consistency.
Answer: Although accounting guidelines allow some degree of
discretion in how transactions are recorded, the consistency
principle requires that the methods be consistently applied by the
company over time in recording and reporting unless there is a
, sound reason to change them. Consistency refers only to consistency
over time; it does not imply consistency across accounts. For
example, a company may properly choose to use LIFO for US
inventory valuation and FIFO for international inventory valuation,
and this is not a violation of the consistency principle.
◉ Contra Account.
Answer: An account for which the typical balance is contrary to
other accounts in its category. Used to adjust the net value of the
account to which it relates. An example is Accumulated Depreciation,
which is a contra-asset account used to arrive at the net book value
of fixed assets.
◉ Contra-Asset.
Answer: An account that exists to adjust the net value of the asset on
the financial records of the company. It is called a contra-asset
account because it has a credit balance and its only purpose is to
modify the value of the related asset. The contra-asset account is
typically shown beneath the related asset in the chart of accounts
and in the financial reports. Examples of a contra-asset accounts are
Reserve for Bad Debts, which is a contra-asset account related to
Accounts Receivable, and Accumulated Depreciation, which is a
contra-asset related to Property, Plant, & Equipment.
◉ Cost of Goods Sold (COGS).
COMPREHENSIVE TEST PAPER QUESTIONS
AND SOLUTIONS GRADED A+
◉ Capital Expenditures.
Answer: The cash flow related to the purchase of property and
equipment. Capital expenditures is part of the free cash flow
equation.
◉ Capitalization.
Answer: The practice of recording the cost of the purchase as an
asset, rather than recording it as an expense when an item is
purchased. For example, when a long-lived asset is purchased, such
as a machine, the cost of the machine is said to be capitalized
because it is recorded as an asset in the accounts. In contrast,
something small and immaterial, such as pens and pencils, may be
expensed immediately.
◉ Cash Accounting Method.
Answer: Under the cash accounting method, a business records
revenues and expenses only when cash is received or disbursed.
Although this method is used by some small, private businesses, it is
not an acceptable method under GAAP for publicly held companies.
,◉ Cash Conversion Cycle.
Answer: Cash conversion cycle is a measure of how long it takes a
business from the time it has to pay for inventory from its suppliers
until it collects cash from its customers. It can be calculated as the
Days Inventory, plus the Average Collection Period, minus the Days
Purchases Outstanding.
◉ Cash Equivalents.
Answer: Short-term, highly liquid investments that can be quickly
converted to cash.
◉ Chart of Accounts.
Answer: List of all of the accounts of a business. This list includes all
asset, liability, equity, revenue, and expense accounts. The accounts
and naming of accounts can vary from business to business.
◉ Circularity.
Answer: A problem with two variables in which the value of each
variable impacts the value of the other variable so that changing
either value impacts the other value.
◉ Common Size Financial Statements.
Answer: Common size financial statements divide each number on
the balance sheet by total assets, and each number in the income
statement by sales. This converts the financial statement items into
,ratios that help us see trends and can easily be compared from one
company to another.
◉ Common Stock.
Answer: The most typical stock or share type representing an
ownership interest in the business. Although there can be different
classes of common shares, owners of these shares usually have
certain rights including the right to share proportionately in the
profits of the business and the right to elect directors and vote on
proposals made by the directors to the shareholders.
◉ Conservatism.
Answer: This principle recognizes that there are some estimates
involved in accounting and says that accounting should reflect the
more cautious estimated valuation rather than the more optimistic
one. For assets it means recording the lower valuation while for
liabilities it means recording the higher possible valuation. For
revenues and gains it means recording them when they are
reasonably certain but for expenses and losses it means recording
them when they are reasonably possible.
◉ Consistency.
Answer: Although accounting guidelines allow some degree of
discretion in how transactions are recorded, the consistency
principle requires that the methods be consistently applied by the
company over time in recording and reporting unless there is a
, sound reason to change them. Consistency refers only to consistency
over time; it does not imply consistency across accounts. For
example, a company may properly choose to use LIFO for US
inventory valuation and FIFO for international inventory valuation,
and this is not a violation of the consistency principle.
◉ Contra Account.
Answer: An account for which the typical balance is contrary to
other accounts in its category. Used to adjust the net value of the
account to which it relates. An example is Accumulated Depreciation,
which is a contra-asset account used to arrive at the net book value
of fixed assets.
◉ Contra-Asset.
Answer: An account that exists to adjust the net value of the asset on
the financial records of the company. It is called a contra-asset
account because it has a credit balance and its only purpose is to
modify the value of the related asset. The contra-asset account is
typically shown beneath the related asset in the chart of accounts
and in the financial reports. Examples of a contra-asset accounts are
Reserve for Bad Debts, which is a contra-asset account related to
Accounts Receivable, and Accumulated Depreciation, which is a
contra-asset related to Property, Plant, & Equipment.
◉ Cost of Goods Sold (COGS).
