D366 Financial Statement Analysis - Set 2 - Part 2

Correct Answer: An asset

Prepaid insurance is an asset because it represents insurance coverage paid for in advance that will benefit future periods. As the coverage is used, the asset is expensed over time.

Correct Answer: Issuing common stock for cash

Issuing common stock for cash increases cash (an asset) and contributed capital (equity) by the same amount, keeping the accounting equation in balance while raising both sides.

Correct Answer: A nominal value assigned to each share in the corporate charter

Par value is a nominal amount assigned to each share, often very small, used for legal and accounting purposes. It usually bears little relationship to the market price of the shares.

Correct Answer: Proceeds from issuing bonds

Proceeds from issuing bonds are a financing activity because they involve raising capital from creditors. Buying equipment is investing, while wages and customer collections are operating activities.

Correct Answer: A contra-asset account that reduces the carrying value of assets

Accumulated depreciation is a contra-asset account that accumulates the total depreciation charged on assets to date. It is subtracted from the asset's cost to show its net book value on the balance sheet.

Correct Answer: Historical cost principle

The historical cost principle requires assets to be recorded at their original acquisition cost, which is objective and verifiable, rather than at fluctuating current market values (with some exceptions).

Correct Answer: Gross profit minus operating expenses

Operating income, or earnings before interest and taxes (EBIT), equals gross profit minus operating expenses such as selling, general, and administrative costs. It reflects profitability from core operations.

Correct Answer: Lenders and creditors

Lenders and creditors use financial statements to evaluate a company's creditworthiness and ability to repay debt, focusing on liquidity, solvency, and cash-generating ability before extending credit.

Correct Answer: A liability

Unearned revenue is a liability because the company has received cash for goods or services it has not yet delivered. It represents an obligation to provide those goods or services in the future.

Correct Answer: Continue operating into the foreseeable future

The going concern assumption presumes a business will continue operating for the foreseeable future, which justifies recording assets at cost and deferring certain expenses rather than assuming immediate liquidation.

Correct Answer: Declaring and paying dividends

Declaring and paying dividends reduces retained earnings and therefore shareholders' equity, as profits are distributed to owners. Issuing shares and earning income both increase equity.

Correct Answer: Current liability

The portion of long-term debt due within the next 12 months is reclassified as a current liability, because it represents an obligation the company must settle in the short term.

Correct Answer: Verify that total debits equal total credits

A trial balance lists all ledger account balances to check that total debits equal total credits, helping detect certain bookkeeping errors before financial statements are prepared.

Correct Answer: FIFO

FIFO (first-in, first-out) assumes the oldest inventory items are sold first. During rising prices, FIFO results in lower cost of goods sold and higher reported ending inventory than LIFO.

Correct Answer: Other comprehensive income items such as certain unrealized gains and losses

Comprehensive income equals net income plus other comprehensive income, which includes items like certain unrealized gains and losses on investments and foreign currency translation adjustments not included in net income.

Correct Answer: Salaries of administrative staff

Administrative salaries are an operating expense incurred in running the business. Loan principal repayment and stock issuance are financing activities, and purchasing a building is an investing activity.

Correct Answer: Original cost minus accumulated depreciation

An asset's book (carrying) value equals its original cost minus accumulated depreciation. This is the amount at which the asset is reported on the balance sheet, not necessarily its market value.

Correct Answer: Balance sheet

The balance sheet is most useful for assessing liquidity at a point in time, because it lists current assets and current liabilities, which are compared to gauge the firm's ability to meet short-term obligations.

Correct Answer: Increase an expense and increase a liability

Recording accrued wages that are owed but not yet paid increases wages expense and increases a wages payable liability, ensuring the expense is recognized in the period the work was performed.

Correct Answer: A one-year period a company uses for financial reporting

A fiscal year is the 12-month period a company uses for annual financial reporting. It may align with the calendar year or end on a different date suited to the company's business cycle.