1. Accounting Basics Susan M. Moncada, Ph.D., CPA
Indiana State University
Questions for Cribbingo Activity
Principles of Financial Accounting
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University

2. Susan M. Moncada, Ph.D., CPA – Indiana State University
Playing Cribbingo
Every time a question is answered, a card will be called.
Students who have the card on their Cribbingo board, place an “X” through the card.
Incorrect answers cause the question to pass to the student on the right. Student who answers the question pegs 1 point for each student who passed it.
5 cards in a row, horizontally, vertically, or diagonally is a Cribbingo, and you win a prize!
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University

3. Susan M. Moncada, Ph.D., CPA – Indiana State University
Also, peg (fill in) the point value of the hand on cribbage board.
Point values are listed at the top and right of the cribbingo card.
Play continues with the same card.
Every time you have Cribbingo, peg your points, and win a prize.
At the end of class time, the student with most points gets a grand prize.
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University

4. Susan M. Moncada, Ph.D., CPA – Indiana State University
Learning Goals
After studying Chapter 2, you should be able to:
Identify the components of a classified balance sheet.
Identify and compute measures for analyzing a company’s profitability.
Identify and compute measures for analyzing liquidity and solvency.
Explain and apply financial reporting concepts.
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University

5. Goal #1: Identify the components of a classified balance sheet.
What are the major sections of assets on the classified balance sheet?
What is the definition of a current asset?
What are some examples of current assets? (list 3)
What are some more examples of current assets? (list 3 more)
What is a prepaid asset?
Answers in Brief:
Current assets; Long-term investments; Property, plant, & equipment; Intangible Assets (at this point)
Assets that a company expects to convert to cash or consume within the current year or operating cycle.
And 4. Cash, short-term investments, accounts receivable, short-term notes receivable, inventories, supplies inventory, prepaid items like insurance, rent, etc.
5. It represents an item purchased in advance of receiving goods or services from the seller.
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University

6. Susan M. Moncada, Ph.D., CPA – Indiana State University
What are examples of long-term investments?
How do we determine whether an asset is classified as property, plant, and equipment?
What are some specific examples of property, plant, and equipment?
What is the definition of an intangible asset?
What are some examples of intangible assets?
Answers in Brief:
5 year certificate of deposit, purchase of stocks or bonds of another company.
Assets with a useful life longer than one year that a company currently uses to operate its business.
Land, buildings, trucks, machinery, computers, office furniture, delivery vehicles
An asset that has no physical substance.
Copryrights, patents, trademarks, trade names, purchase of a franchise, goodwill.
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University

7. Susan M. Moncada, Ph.D., CPA – Indiana State University
How is the liability section of a classified balance sheet divided?
How are current liabilities defined?
What are some examples of current liabilities?
What are some examples of long-term debt?
What are the two components of stockholders’ equity?
Answers in Brief:
Current and Non-current liabilities
A company’s obligations that the company reasonably expects to pay within the next year.
Accounts payable, short-term notes payable, salaries payable, utilities payable.
Mortgage payable, bonds payable, long-term notes payable (due in 2 or more years)
Paid in Capital (or Common Stock at this point) and Retained Earnings.
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University

8. Goals 2 & 3: Measuring profitability, liquidity, & solvency
What is the difference between an intra- company comparison and an intercompany comparison.
What is the purpose of a profitability ratio?
What does earnings per share measure?
How is earnings per share computed?
What is liquidity?
Answers in Brief:
Intracompany comparision - Comparing ratios or data for the same company for two or more years. Intercompany comparisons involved two or more companies in the same industry.
Profitablity – operating success of the company (Revenues – Expenses, as an example)
The net income earned on each share of common stock.
At this level the formula is (net income – preferred dividends)/average common shares outstanding.
The entity’s ability to pay its debts that are expected to become due within the next year or operating cycle.
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University

9. Susan M. Moncada, Ph.D., CPA – Indiana State University
Goals 2 & 3: Measure for analyzing profitability, liquidity, & solvency
How is working capital computed?
How is the current ratio computed?
How is a current ratio of 2.5:1 interpreted?
What is a potential weakness of the current ratio?
How is solvency defined?
What is one measure of solvency?
Answers in Brief:
Current assets minus current liabilities
Current assets divided by current liabilities
For every $1 payable within the next 12 months, the company has $2.50 worth of current assets.
It fails to consider the composition of the current assets and how quickly they can be converted to cash.
Solvency is a measure of the entity’s ability to pay its debts in the long term., i.e, interest as it becomes due as well as debts that become due at maturity.
Debt to total asset ratio.
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University 9

10. Susan M. Moncada, Ph.D., CPA – Indiana State University
Cash……………………… ,000
Accounts Receivable…. 35,000
Inventory………………….. 20,000
Delivery truck………….. 15,000
Accounts payable…….. 10,000
Bonds payable………….. 15,000
What is working capital?
What is the current ratio?
What is the debt to total asset ratio?
Solution
(40, , ,000) – 10,000 = 75,000
85,000/10,000 = 8.5:1
25,000/100,000 = 25%
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University

11. Goal 4: Applying Financial Reporting Concepts
What is GAAP?
What does the SEC do?
What is the FASB?
What is the IASB?
In terms of useful information what is relevance?
In terms of useful information what is reliability
Answers in Brief:
Generally accepted accounting principles. - rules and procedures that guide how accounting is applied to business entities.
Securities and Exchange Commission – U.S. government agency that oversees the U.S. financial markets and accounting standard-setting organizations.
Financial Accounting Standards Board – the primary accounting standard setting body in the U.S.
International Accounting Standards Board – standard setting body for a substantial number of other countries including the European union, Japan, etc.
Accounting information that makes a difference when a business decision is made. Reliability includes timeliness, predictive value, and providing feedback.
Reliable information is neutral, verifiable, and factual. It can be depended on.
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University

12. Susan M. Moncada, Ph.D., CPA – Indiana State University
What is consistency?
What does comparability mean?
What does the cost principle require?
What does the monetary unit assumption require?
What does the economic entity assumption imply?
What does the going concern assumption imply?
Answers in Brief:
Using the same accounting principles and methods from year to year.
Two different companies use the same accounting principles and methods.
Assets must be recorded at their original cost.
Only those items that can be measured using some monetary unit are included in the accounting records.
Business entities can be separately identified and accounted for from its owners.
Businesses will remain in operation in the foreseeable future.
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University

13. Susan M. Moncada, Ph.D., CPA – Indiana State University
What are the two constraints that affect the application of accounting principles?
In terms of accounting, what does the term “immaterial” mean?
What is an example of an immaterial item?
What does the conservatism constraint require?
Answers in Brief:
Materiality and Conservatism
The impact of an item on the financial statements is too small to impact the decision makers.
Expensing the purchase of a waste basket instead of recording it as property, plant, and equipment.
Choose the accounting method that is least likely to overstate assets or income.
9/21/2018
Susan M. Moncada, Ph.D., CPA – Indiana State University