1) When a company has net income, what happens to its stockholders\' equity, its
ID: 2453774 • Letter: 1
Question
1) When a company has net income, what happens to its stockholders' equity, its assets, and/or its liabilities?
2) Is accrual accounting more closely related to a company's goal of profitability or liquidity?
3) Would you expect net income to be a good measure of a company's liquidity? Why or why not?
Chapter 4
1) How do the four basic financial statements meet the stewardship objective of financial reporting?
2) When might an amount be material to management but not to the CPA auditing the financial statements?
3) Why is it important to compare a company's financial performance with industry standards?
). Why is a physical inventory needed under both the periodic and perpetual inventory systems?
2) Which is a better measure of a company's performance - income from operations or net income?
3) Suppose you sold goods to a company in Europe at a time when the exchange rat for the dollar was declining in relation to the euro. Woud you want the European company to pay you in dollars or euros/ Why?
Explanation / Answer
When a company has net income, what happens to its stockholders' equity, its assets, and/or its liabilities?
Answer - When a company has net income, its stockholders' equity increases by the same amount because, the net income belong to the equity share holders. Since, the value of equity shareholders' value will increase, it will result in increase in the value of Liabilities also.
Is accrual accounting more closely related to a company's goal of profitability or liquidity?
Answer - Accrual accounting system is more closely related to the company's goa of profitability.This is because this system is based on the concept of matching of costs pertaining to a particular period with the corresponding revenues of that period, hence, it helps in determining the correct profit pertaining to the concerned period.
Would you expect net income to be a good measure of a company's liquidity? Why or why not?
Answer - Net income cannot be considered to be good measurement of the liquidity of a company because the net income might increase due to decline in some non-cash expenditure such as decline in depreciation. Similarly, net income for a particular period migh be higher to due to some non-recurring income such as gain on sale of assets.
How do the four basic financial statements meet the stewardship objective of financial reporting?
Answer - The four basic financial statements and their role in meeting the stewardship objective of financial reporting is as follows:
a) Balance sheet- It gives a snapshot of the status of Assets and Liabilities of a business and the movement therein if compared with some corresponding period numbers
b) Income statement - it helps in determining the profitability of a business over a period of time
c) Cash Flow Statement - It is prepared to deterimine the cah flow from operating, financing and investing activities over a period of time
d) Statement of retainied earnings - it helps in determining the manner in which the net income and distribution of dividends affect the financial position of a business during a period.
When might an amount be material to management but not to the CPA auditing the financial statements?
Answer - When a CPA audits the financial statements, he should consider the aspect of materiality of the transactions. However, the concept of materiality is based on the judgement of the person reviewing the financial statements. Usually, materiality of an amount is based on the value of the amount, its nature and its impact of the overall true and fair vierw of the financial statements. However, there can be a situation where the management is aware of a circumstance which has given rise to a certain amount in the financial statement but which is not known to the auditor, hence giving rise to this situation.
Why is it important to compare a company's financial performance with industry standards?
Answer - It is important to compare the financial performance of a company with the industry standards so as to ascertain the actual performance of the company vis a vis its peers. It helps the stakeholder to ascertain how well the company is performing when the overall performance of the industry is compared with that of the company.
Why is a physical inventory needed under both the periodic and perpetual inventory systems?
Answer - Physical inventory is important because it helps in comparing the actual quantity of inventory held by a company with the quantity mentioned in the inventory records of the company and hence, helps in maintaining effective control over the loss of inventory.
Which is a better measure of a company's performance - income from operations or net income?
Answe - Income from operations is a better measure of of company's performance because if a company is earning profit from its operations, then it can sustain for a long time. There can be a situation wherein the company has loss from its operations but has a positive net income because of some non operating income such as Interest Earned from investments, income from foreign exchange translation etc. Hence, to determine the efficiency of opertions of a business, it is important to consider the Income from operations.
Suppose you sold goods to a company in Europe at a time when the exchange rate for the dollar was declining in relation to the euro. Woud you want the European company to pay you in dollars or euros/ Why?
Answer - In this case, it is beneficial to receive the money in dollars because in such a case, the company would receive the exact amount in dollar which is equal to the value mentioned in the invoice. However, if the company receives the money in Euro, then it wil receive lesser amount on conversion of Euro to dollar because of decline in exchange rate of dollar in relation to Euro.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.