[FINAL EXAM] Accounting for Decision Making Final Exam Guide www.paperscholar.com DIRECT LINK TO THIS STUDY GUIDE: http://www.paperscholar.com/final-exam-accounting-decision-making-final-exam-guide/
Instantly Download! Get Better Grades in Less Time! 100% Satisfaction Guarantee DESCRIPTION FOR THIS STUDY GUIDE: Includes study guides for: 1. Earning power refers to a company’s ability to sustain its profits from operations. 2. One objective of the income statement is to separate the results of continuing operations from those of discontinued operations. 3. When the disposal of a significant segment occurs, the income statement should report both income from continuing operations and income (loss) from discontinued operations. 4. An event or transaction should be classified as an extraordinary item if it is unusual in nature or if it occurs infrequently. 5. Companies report most changes in accounting principle currently. 6. The loss on disposal of a significant component of a business is disclosed in the statement of retained earnings. 7. A change in accounting principle occurs when the principle used in the current year is different from the one used by competitors in the current year.
8. Comprehensive income includes all changes in stockholders’ equity during a period except those resulting from investments by stockholders and distributions to stockholders. 9. Comprehensive income includes all revenues, expenses, gains, losses, and dividends. 10. Intracompany comparisons of the same financial statement items are often useful to detect changes in financial relationships and significant trends. 11. Comparisons of company data with industry averages provide information about a company’s relative position within the industry. 12. Horizontal, vertical, and circular analyses are the basic tools of financial statement analysis. 13. In horizontal analysis, the base year is the most current year being examined. 14. Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year. 15. Another name for horizontal analysis is trend analysis. 16. If a company has sales of $110 in 2007 and $154 in 2006, the percentage decrease in sales from 2006 to 2007 is 140%. 17. In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, no percentage change for that item can be computed. 18. A primary purpose of vertical analysis is to observe trends over a three-year period. 19. Vertical analysis is a technique for evaluating a series of financial statement data over a period of time to determine the increase (decrease) that has taken place. 20. Common size analysis expresses each item in a financial statement as a percent of a base amount. 21. In a common size income statement, net sales are represented by 100%. 22. In a common size income statement, each item is expressed as a percentage of net income. 23. In a common size balance sheet, total assets are represented by 100%. 24. In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities. 25. Vertical analysis is useful in making comparisons of companies of different sizes. 26. Using vertical analysis of the income statement, a company’s net income as a percentage of net sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%. 27. In the vertical analysis of an income statement, each item is generally stated as a percentage of net income. 28. Liquidity ratios measure the ability of the enterprise to survive over a long period of time. 29. A solvency ratio measures the income or operating success of an enterprise for a given period of time. 30. The current ratio is a measure of all the ratios calculated for the current year. 31. Receivable turnover is useful in assessing the profitability of receivables. 32. The inventory turnover ratio measures the number of times on the average the inventory was sold during the period. 33. Inventory turnover is a measure of liquidity that focuses on efficient use of inventory. 34. Profitability ratios are frequently used as a basis for evaluating management’s operating effectiveness. 35. Both profit margin and asset turnover affect a company’s return on assets. 36. Leverage and return on equity are closely related.
37. The return on assets ratio will be greater than the rate of return on common stockholders’ equity if the company has been successful in trading on the equity at a gain. 38. The current ratio is one of the most utilized measures of profitability. 39. From a creditor’s point of view, the higher the total debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations. 40. A current ratio of 1.2 to 1 indicates that a company’s current assets exceed its current liabilities. 41. Using borrowed money to increase the rate of return on common stockholders’ equity is called “trading on the equity.” 42. Declining profitability and liquidity ratios are indications that a company may not survive. 43. Alternative accounting methods affect the quality of earnings. 44. Improper recognition of income is not one of the factors affecting the quality of earnings. 45. Because pro forma earnings are based on specific rules, these amounts are highly reliable.