Accounting 101 Exam #2 with
Complete Solutions
Securities and Exchange Commission (SEC) - ANSWER-mission is to protect investors
and maintain the integrity of the securities markets; makes sure that corporations
adhere to GAAP
Financial Accounting Standards Board (FASB) - ANSWER-creates GAAP
What does an auditor's opinion state? - ANSWER-1) whether the firm's financial
statements conform with GAAP and 2) whether the firm's financial statements fairly
represent the firm's financial position
unqualified/clean auditor opinion - ANSWER-no qualifications
unqualified with explanatory paragraph auditor opinion - ANSWER-examples: change in
accounting principle or going-concern issue
qualified auditor opinion - ANSWER-there is some departure from GAAP
adverse auditor opinion - ANSWER-some departure from GAAP puts doubt on overall
financial statements
disclaimer of opinion auditor opinion - ANSWER-auditor does not give opinion on
financial statement
financial analysts - ANSWER-receive accounting info from firms and use this to forecast
accounting earnings
information services (give examples) - ANSWER-Google.com/finance, Bloomberg.com
10K Report - ANSWER-annual report
10Q Report - ANSWER-quarterly report
8K Report - ANSWER-informational, e.g. if you change CEOs or corporate governance;
as-needed basis
gross profit - ANSWER-net sales - COGS
, income from operations - ANSWER-gross profit - operating expenses
income before income taxes - ANSWER-income from operations +/- non operating
revenues/expenses and gains/losses
discontinued operations - ANSWER-results from the sale or disposal of a major
component of a firm
extraordinary items - ANSWER-unusual and infrequent occurrences resulting in
gains/losses
gross profit percentage meaning - ANSWER-how much of a premium the firm charges
on its products above their costs
footnotes to financial statements - ANSWER-disclose additional information (e.g.
discussion of key accounting rules used, more detail, relevant info not disclosed in the
statements)
return on assets ratio - ANSWER-net income/average total assets
return on assets ratio meaning - ANSWER-measures how much profit a firm generates
from every dollar of assets
ROA profit driver analysis - ANSWER-composed of 1) net profit margin and 2) total
asset turnover
net profit margin - ANSWER-net income/net sales
total asset turnover - ANSWER-net sales/average total assets
FOB shipping point - ANSWER-revenue is recognized when goods are shipped
FOB destination - ANSWER-revenue is recognized when goods arrive at their
destination
How do we account for returns from customers? - ANSWER-contra-revenue account
called "Sales Returns and Allowances"
sales discounts (cash discounts) - ANSWER-given to encourage quick payments by
customers who purchase on credit; a contra revenue
What does 2/10, n/30 mean? - ANSWER-2% sales discount if the customer can pay
back the amount in 10 days, otherwise the full amount is due at the end of 30 days
bad debt - ANSWER-an accounts receivable that will never be collected from the
customer; overstates assets and stockholders' equity
Complete Solutions
Securities and Exchange Commission (SEC) - ANSWER-mission is to protect investors
and maintain the integrity of the securities markets; makes sure that corporations
adhere to GAAP
Financial Accounting Standards Board (FASB) - ANSWER-creates GAAP
What does an auditor's opinion state? - ANSWER-1) whether the firm's financial
statements conform with GAAP and 2) whether the firm's financial statements fairly
represent the firm's financial position
unqualified/clean auditor opinion - ANSWER-no qualifications
unqualified with explanatory paragraph auditor opinion - ANSWER-examples: change in
accounting principle or going-concern issue
qualified auditor opinion - ANSWER-there is some departure from GAAP
adverse auditor opinion - ANSWER-some departure from GAAP puts doubt on overall
financial statements
disclaimer of opinion auditor opinion - ANSWER-auditor does not give opinion on
financial statement
financial analysts - ANSWER-receive accounting info from firms and use this to forecast
accounting earnings
information services (give examples) - ANSWER-Google.com/finance, Bloomberg.com
10K Report - ANSWER-annual report
10Q Report - ANSWER-quarterly report
8K Report - ANSWER-informational, e.g. if you change CEOs or corporate governance;
as-needed basis
gross profit - ANSWER-net sales - COGS
, income from operations - ANSWER-gross profit - operating expenses
income before income taxes - ANSWER-income from operations +/- non operating
revenues/expenses and gains/losses
discontinued operations - ANSWER-results from the sale or disposal of a major
component of a firm
extraordinary items - ANSWER-unusual and infrequent occurrences resulting in
gains/losses
gross profit percentage meaning - ANSWER-how much of a premium the firm charges
on its products above their costs
footnotes to financial statements - ANSWER-disclose additional information (e.g.
discussion of key accounting rules used, more detail, relevant info not disclosed in the
statements)
return on assets ratio - ANSWER-net income/average total assets
return on assets ratio meaning - ANSWER-measures how much profit a firm generates
from every dollar of assets
ROA profit driver analysis - ANSWER-composed of 1) net profit margin and 2) total
asset turnover
net profit margin - ANSWER-net income/net sales
total asset turnover - ANSWER-net sales/average total assets
FOB shipping point - ANSWER-revenue is recognized when goods are shipped
FOB destination - ANSWER-revenue is recognized when goods arrive at their
destination
How do we account for returns from customers? - ANSWER-contra-revenue account
called "Sales Returns and Allowances"
sales discounts (cash discounts) - ANSWER-given to encourage quick payments by
customers who purchase on credit; a contra revenue
What does 2/10, n/30 mean? - ANSWER-2% sales discount if the customer can pay
back the amount in 10 days, otherwise the full amount is due at the end of 30 days
bad debt - ANSWER-an accounts receivable that will never be collected from the
customer; overstates assets and stockholders' equity
