Genral purpose Financial Statements

Question 1

Purpose of Balance Sheet

Answer 1

Reports economic resources and obligations as of a specific date.

Assets = Liabilities + Shareholders’ Equity

Question 2

Order of Items on Balance Sheet

Answer 2

Current Assets 
Long Term Assets
Short term liabilities 
Long Term liabilities 
Shareholders’s equity

Presented in order of liquidity (cash at the top)

Question 3

Current Assets

Answer 3

Assets expected to be used up within one year.

Examples:
Cash
Inventory
Prepaid expenses 
Accounts Receivable
Short term investments

Question 4

Examples of long-term assets

Answer 4

Property, Plant, and equipment
Investments
Goodwill
Patents

Question 5

Current liabilities

Answer 5

Liabilities expected to be resolved within one year. Presented in order of maturity, usually starting with accounts payable.

Examples:
Accounts payable
Short term debt
Bonds or dividends payable within the next year
Income tax payable
Accrued expenses
Deferred revenue

Question 6

Examples of long-term liabilities

Answer 6

Notes payable
Capital lease obligations
Bonds payable (non-current)

Question 7

Balance Sheet shows what a company has as of what

Answer 7

A certain date, usually December 31.

Question 8

Current Ratio

Answer 8

Used to evaluate current assets compared to current liabilities. Does the company have enough short term resources to cover their short-term liabilities. You want to see a ratio of at least 1 to show that the company has more current assets than current liabilities.

= Current assets/current liabilities

Question 9

Quick ratio

Answer 9

More telling version of the current ratio, with inventory taken out of the equation.

= (Current Assets - Inventory)/ Current Liabilities

Question 10

Debt to equity ratio

Answer 10

The ratio of what is owed to what is owned

= Total Liabilities/Shareholders’ Equity

Question 11

Goods that are out on consignment should be included…

Answer 11

In the company’s inventory at their cost.

Question 12

Money collected in advance for a product will go where

Answer 12

Liabilities section as deferred revenue. The transactions has created a “liability” to provide goods or services to the customer who has now paid in advance.

Question 13

Gift Cards/gift certificates go where?

Answer 13

Deferred revenue until they are either used and become revenue, or if they expire, they become revenue when they expire.

Question 14

Income statement

Answer 14

Revenues and expenses are from direct business activities, and gains or losses result from non-business activities such as a manufacturing company selling old equipment.

Question 15

How is an income statement organized

Answer 15

Show a company’s activities for the year with the end result being net income.

Sales
-COGS
Gross Income
-Selling, General & admin expenses
-Depreciation
Operating income
\+/- Misc. revenue/gains/expenses/losses (interest income, misc. expenses)
Income before tax
-income tax expense
Income from continuing operations
\+/- Income from discontinued operations
Net income

Question 16

Multiple Step Income Statement vs Single Step Income Statement

Answer 16

Single step income statement is very simplified and just lumps revenues and gains together and then expenses and losses together, netting the two leaving net income

Multiple step income statement breaks things out so that investors can see gross profit, operating income, and then non-operating revenue/gains/losses separate from operating income, which all together is income from continuing operations. The last item is income from discontinued operations-if there is any- and then finally net income.

Question 17

Amortization of a discount on a note payable is what?

Answer 17

Interest expense (it is a contra liability on the balance sheet and as it’s amortized it’s recognized on the income statement as an interest expense).

Question 18

Gross Margin

Answer 18

Gross Profit/net sales

Measures the percentage of sales available for expenses and profit after subtracting COGS.

Question 19

Profit Margin

Answer 19

Net Income/Net Sales

Measures the percentage of sales that becomes profit.

Question 20

Earnings per share

Answer 20

Net income/weighted avg # of common shares outstanding.

Measures net income on a per share basis

Question 21

Statement of comprehensive income

Answer 21

Shows a total picture of all operating income, gains & losses.

Net income + other comprehensive income = Comprehensive Income

Question 22

Other comprehensive income items

Answer 22

Unrealized gains or losses on AFS securities
Unrecognized gains or losses from pension costs
Foreign currency translation adjustments
Unrealized gains or losses from certain derivative transactions

Question 23

Comprehensive income presentation (two ways)

Answer 23

In combination with the income statement: Other comprehensive income would be added just below ‘net income’.

Or as a separate statement: You’d have the income statement and a separate statement of comprehensive income. The separate statement starts with net income and then reports other comprehensive income.

Question 24

Reclassification Adjustments

Answer 24

“Accumulated other comprehensive income” (AOCI) is reported in the shareholders’ equity section of the balance sheet. The OCI items are accumulated there until the gain is realized (such as an AFS security actually being sold), and then will be reclassified through net income and the AOCI is reduced by that amount, otherwise these gains would be counted twice. These reclassification adjustments are reported in the notes to the financial statements.

Question 25

Statement of changes in equity

Answer 25

Shows changes during the year for the following items:

Common stock
Preferred stock
Additional paid-in-capital
Retained earnings
Treasury stock
AOCI

Can either be part of the footnotes or as a separate statement. Public companies show 3 years of comparative owners’ equity on their statement of changes in equity.

Question 26

Statement of cash flows

Answer 26

Show changes in cash during the period

Users want to know about a company’s ability to generate and control cash in order to assess the company’s ability to meet its obligations.

Question 27

Three types of cash flows on a cash flow statement

Answer 27

Operating
Investing
Financing

Question 28

Operating cash flow

Answer 28

Changes in cash resulting from business operations

Cash received from customers
Dividend income
Interest income/expense
Cash paid for business expenses

Question 29

Investing cash flow

Answer 29

Changes in cash resulting from investing activities

Purchase/sale of investments or long term assets
Making loans (getting a loan would be financing)

Question 30

Financing cash flow

Answer 30

Changes in cash resulting from financing activities

Issuing and selling company stock
Purchasing treasury stock
Getting a loan (also making payments on a loan)
Paying dividends
Issuing bonds

Question 31

IFRS rules with regards to interest and dividends

Answer 31

Interest and dividends paid can be classified as either an operating or a financing activity

Interest and dividends received received can be classified as either operating or investing.

Question 32

Non-cash activities

Answer 32

Transactions that are significant but don’t affect cash, and so would not be part of the statement of cash flows. An example would be converting debt into stock. These would be reported in the notes to the financials or in a separate schedule.

Question 33

Difference in the Direct vs Indirect method of Cash Flow Statement

Answer 33

The only real difference in the two methods deals with the operating activities section: in the direct method, each line is a “direct” statement showing cash paid or received such as “cash paid to customers” or “cash paid to suppliers”. On an indirect statement, operating activities starts with net income and works backwards to “cash provided by operating activities”, and several non-cash items such as depreciation expense or gain/loss on sale of equipment.

Question 34

Managements’ discussion and analysis

Answer 34

Required part for publicly held companies, it discusses operations, liquidity, and capital resources.

Question 35

Significant Accounting Policies

Answer 35

There needs to be disclosures on significant accounting policies and how they are applied. Some of the items should be included if applicable:

A company’s revenue recognition policies
How a company determines what investments are cash equivalents
How a company priced their inventory
Methods for amortizing intangibles

Question 36

Other Disclosures

Answer 36

During times of price stability, a disclosure is required discussing the effects of the instability on the company’s business.

Related party transactions: Any significant related party information would be discussed in the notes.

Question 37

Concentration of credit risk

Answer 37

If a business and most of its customers/suppliers all operate in the same industry, then a concentration of credit risk needs to be disclosed in the notes.

Question 38

Contingent Liabilities

Answer 38

Possible liabilities that are not both probable and can be reasonably estimated (if it was both it would be on the balance sheet) would be discussed in the notes instead of being accrued on the balance sheet.