Financial Statements

Question 1

What is a major exception of the all-inclusive income statement?

Answer 1

Prior period adjustments. These are corrections of errors affecting prior year net income. These are shown on the statement of retained earnings

Question 2

What is the balance sheet used for?

Answer 2

Businesses disclose its economic resources (assets) and the manner of financing the acquisition of those resources (creditors, owners contributions, prior year’s earnings)

Question 3

What are the two presentation formats of the balance sheet?

Answer 3

1.) the account format

Assets. Liabilities
Stockholders equity

2.)Report form

Assets
Liabilities
Stockholders equity

Question 4

Which balances sheet approach emphasizes the balance sheet equation?

Answer 4

The account form as liabilities and equity are shown on the same side

Question 5

What is statement of comprehensive income?

Answer 5

1. ) reports all non-owner changes in equity over a period of time
2. ) includes items that are not part of net income such as:

Unrealized gains and losses
Adjustments in calculation of pension liability
Foreign currency translation adjustments
Deferrals of certain gains on hedge accounting

Question 6

How are assets classified on the balance sheet?

Answer 6

In order of decreasing liquidity. The most liquid assets are shown first and the less liquid shown last

Question 7

How are liabilities classified on the balance sheet?

Answer 7

In order of maturity. Current shown first

Question 8

How are owners equity items classified on the balance sheet?

Answer 8

In order of permanence

Question 9

What is the operating cycle of a company?

Answer 9

The period of time required to purchase or produce inventory, sell the inventory, and collect cash from resulting receivables

Question 10

What are current assets?

Answer 10

Assets that are in the form of cash, or will be converted into cash or consumed within one year or the operating cycle of the business, whichever is longer

Question 11

What are current liabilities?

Answer 11

Liabilities due in the upcoming year or in the operating cycle of business whichever is longer, and that will be met through the transfer of a current asset or the creation of another current liability. Both criteria must be met

Question 12

What is the statement of cash flows?

Answer 12

1.) the third of the three major financial statements required. Describes the changes in cash by meaningful category. Dated for the entire period same as income statement

Question 13

What is the purpose of the statement of cash flows?

Answer 13

To explain the change in cash and equivalents during the past accounting year.

Question 14

What are cash equivalents?

Answer 14

Short term investments that:

1. ) are convertible into a known and fixed amount of cash.
2. ) have an original maturity date to the purchaser of three months or less

Stocks are not considered cash equivalents

Question 15

What are the 3 categories cash flows are classified into on the statement of cash flows?

Answer 15

1. ) operating - cash flows related to transactions on the income statement
2. ) investing - cash flows related to the acquisition and disposal of long term assets and investments
3. ) financing - cash flows related to the liabilities and owners equity

Question 16

What approach is the income statement prepared on?

Answer 16

All-inclusive - that is almost all revenues, expenses, gains and losses are shown