Accounting Exam 4 Study Guide
Questions and Answers
List and summarize each of the 4 basic Audit Opinions - Answer-1. Unqualified 2.
Qualified 3. Adverse 4. Disclaimer
Adverse - Answer-Not in accordance with GAAP
Unqualified - Answer-Conforms to GAAP -> no errors or misstatements
Disclaimer - Answer-Not able to form an opinion (scope restriction)
Qualified - Answer-Conforms to GAAP except for one or two items
Classify Premium on Bonds Payable - Answer-Long-term liability
Classify Cash - Answer-Current asset
Classify Taxes Payable - Answer-Current liability
Classify discount on short-term note payable - Answer-Contra-liability (short-term)
Classify customer deposits - Answer-Current liability
Classify common stock - Answer-Owners' equity; Stockholders' equity
What are the accounts that are classified under "Other Revenues and Expenses" on the
Income Statement - Answer-Gains, losses, interest revenue, interest expense, dividend
revenue, and unrealized gains and losses on trading securities
What kind of stock do you use for ESP - Answer-Common stock outstanding
How to calculate weighted number of shares - Answer-Multiple outstanding stock by the
number of months you have them
How to calculate EPS - Answer-Net Income - Preferred Stock Dividends/ Weighted
Average # of Common Shares Outstanding
Calculate Preferred Stock Dividends - Answer-P/S Outstanding x P/S rate x P/S par
value
How to calculate Long Term Liabilities - Answer-Total Long-term Liabilities= Notes
Payable (Long term) - Discount on notes payable (lt) + Bonds payable + Premium on
bonds payable
, What do you do when you see premium - Answer-Add it
What do you do when you see discount - Answer-Subtract it
What is the formula for computing the amount recorded on the Income Statement for a
Discontinued Operation? - Answer-Gain/Loss × (1 - tax rate)
Why is it important that these items be listed separately from other income and expense
items? - Answer-To show that these items are not part of the normal operations of the
business and should not affect future earningsto increase the readability of the financial
statements
Why are these items shown net of taxes? - Answer-Because discontinued operations
items show up after income from continuing operations, and income from continuing
operations is an after-tax number
Vertical Analysis compares - Answer-a given period to the total for that period (one
account to the total for that account type).
Horizontal Analysis compares - Answer-one period to another. Looks at one account
over several periods
What outside parties are considered major users of financial analysis, and why do
certain financial ratios matter to each of the parties?? - Answer-1. Creditors: want to
make sure they get their investments back and receive a return 2. Equity investors:
want the investment to generate an acceptable return 3. Both outside parties want to
receive a return that makes the investment a smart choice for them
Accounts Receivable Turnover Ratio - Answer-An increase in this ratio is preferable, as
it would mean that cash is coming into our business at a faster rate.
Debt to Equity Ratio - Answer-As this ratio increases, the overall risk associated with
the business increases. Total debt/total equity
Current Ratio - Answer-A creditor would likely give a short-term loan to a company with
a high ___________, as it demonstrates that the company has current assets to repay
its current liabilities.
Working Capital - Answer-Current Assets - Current Liabilities = ??
Gross Margin Ratio - Answer-An increase in this ratio is preferable, as it means that the
company has increased profit per sale.
Inventory Turnover Ratio - Answer-A decrease in this ratio is not preferable, as it would
mean that our inventory is not producing a return for the company.
Questions and Answers
List and summarize each of the 4 basic Audit Opinions - Answer-1. Unqualified 2.
Qualified 3. Adverse 4. Disclaimer
Adverse - Answer-Not in accordance with GAAP
Unqualified - Answer-Conforms to GAAP -> no errors or misstatements
Disclaimer - Answer-Not able to form an opinion (scope restriction)
Qualified - Answer-Conforms to GAAP except for one or two items
Classify Premium on Bonds Payable - Answer-Long-term liability
Classify Cash - Answer-Current asset
Classify Taxes Payable - Answer-Current liability
Classify discount on short-term note payable - Answer-Contra-liability (short-term)
Classify customer deposits - Answer-Current liability
Classify common stock - Answer-Owners' equity; Stockholders' equity
What are the accounts that are classified under "Other Revenues and Expenses" on the
Income Statement - Answer-Gains, losses, interest revenue, interest expense, dividend
revenue, and unrealized gains and losses on trading securities
What kind of stock do you use for ESP - Answer-Common stock outstanding
How to calculate weighted number of shares - Answer-Multiple outstanding stock by the
number of months you have them
How to calculate EPS - Answer-Net Income - Preferred Stock Dividends/ Weighted
Average # of Common Shares Outstanding
Calculate Preferred Stock Dividends - Answer-P/S Outstanding x P/S rate x P/S par
value
How to calculate Long Term Liabilities - Answer-Total Long-term Liabilities= Notes
Payable (Long term) - Discount on notes payable (lt) + Bonds payable + Premium on
bonds payable
, What do you do when you see premium - Answer-Add it
What do you do when you see discount - Answer-Subtract it
What is the formula for computing the amount recorded on the Income Statement for a
Discontinued Operation? - Answer-Gain/Loss × (1 - tax rate)
Why is it important that these items be listed separately from other income and expense
items? - Answer-To show that these items are not part of the normal operations of the
business and should not affect future earningsto increase the readability of the financial
statements
Why are these items shown net of taxes? - Answer-Because discontinued operations
items show up after income from continuing operations, and income from continuing
operations is an after-tax number
Vertical Analysis compares - Answer-a given period to the total for that period (one
account to the total for that account type).
Horizontal Analysis compares - Answer-one period to another. Looks at one account
over several periods
What outside parties are considered major users of financial analysis, and why do
certain financial ratios matter to each of the parties?? - Answer-1. Creditors: want to
make sure they get their investments back and receive a return 2. Equity investors:
want the investment to generate an acceptable return 3. Both outside parties want to
receive a return that makes the investment a smart choice for them
Accounts Receivable Turnover Ratio - Answer-An increase in this ratio is preferable, as
it would mean that cash is coming into our business at a faster rate.
Debt to Equity Ratio - Answer-As this ratio increases, the overall risk associated with
the business increases. Total debt/total equity
Current Ratio - Answer-A creditor would likely give a short-term loan to a company with
a high ___________, as it demonstrates that the company has current assets to repay
its current liabilities.
Working Capital - Answer-Current Assets - Current Liabilities = ??
Gross Margin Ratio - Answer-An increase in this ratio is preferable, as it means that the
company has increased profit per sale.
Inventory Turnover Ratio - Answer-A decrease in this ratio is not preferable, as it would
mean that our inventory is not producing a return for the company.
