A Framework for Financial Accounting

Question 1

Financing

Answer 1

Borrowing or paying back money to creditors

Raising or returning capital to stockholders

Question 2

Investing

Answer 2

Buying items used in the production or support of the business

Utilizing funds to increase returns (JV, Investments, etc.)

Question 3

Operating

Answer 3

Selling products or services (collecting from customers)

Purchasing goods and services to run the business

Question 4

corporation

Answer 4

A corporation is a company that is
legally separate from its owners.

The advantage of being legally separate is
that the stockholders have limited liability.

Question 5

sole proprietorship

Answer 5

A sole proprietorship is a business owned by one person.

Question 6

partnership

Answer 6

A partnership is a business owned by two or more persons.

Neither sole proprietorships nor partnerships offer limited liability.

Question 7

The Accounting Equation

Answer 7

Assets = Liabilities + Stockholders Equity

The accounting equation illustrates a fundamental model of business valuation.

Question 8

Assets

Answer 8

total resources of the company

Question 9

Liabilities

Answer 9

amounts owed to creditors

Question 10

Stockholders’ equity

Answer 10

owners’ claims to resources

Question 11

Financial Statements – 4 Key Components

Answer 11

Balance Sheet

Income Statement

Statement of Stockholders’ Equity

Statement of Cashflows

Question 12

Balance Sheet

Answer 12

reports the financial position at a point in time

Question 13

Income Statment

Answer 13

reports the revenues & expenses during the accounting period

Question 14

Statement of Stockholders’ Equity

Answer 14

reports the changes in each of the stockholders’ equity accounts

Question 15

Statement of Cash Flows

Answer 15

reports inflows and outflows of cash during the accounting period

Question 16

What are the elements of “Assets” on a balance sheet?

Answer 16

Cash
Short-Term Investments
Accounts Receivable
Notes Receivable
Inventory (to be sold)
Supplies
Prepaid Expenses
Long-Term investments
Equipment
Buildings
Land
Intangibles

Question 17

What are the elements of “Liabilities” on a balance sheet?

Answer 17

Accounts Payable
Accrued Expenses
Notes Payable
Taxes Payable
Unearned Revenue
Bonds Payable

Question 18

What are the elements of “stockholders’ equity” on a balance sheet?

Answer 18

Common Stock
Retained Earnings

Question 19

What are the elements of “Revenues” on an Income Statement?

Answer 19

Cash and promises received from delivery of goods and services.

i.e.
Sales Revenue
Fee Revenue
Interest Revenue
Rent Revenue

Question 20

What are the elements of “Expenses” on an income statement?

Answer 20

Resources used to earn period’s revenues.

i.e.
Cost of Goods Sold
Wages Expense
Rent Expense
Depreciation Expense
Insurance Expense
Repair Expense
Income Tax Expense

Question 21

Income Statement Equation

Answer 21

Revenues - Expenses = Net Income

Question 22

What are the elements of “StockHolders’ Equity”?

Answer 22

Common Stock
Retained Earnings

Question 23

What are the elements of common stock?

Answer 23

(External)

Amounts invested in the business by stockholders

Beginning Common Stock + Stock Issuance = Ending Common Stock

Question 24

What are the elements of retained earnings?

Answer 24

(Internal)

Past earnings not distributed to stockholders.

Beginning retained earnings + net income - dividends = ending retained earnings

Question 25

What are the elements of Statement of Cashflows?

Answer 25

Cash Flows from Operating Activities
Cash Flows from investing activities
Cash Flows from financing activities

Question 26

What are cash flows from operating activities?

Answer 26

Cash transactions involving revenue and expense activities

Question 27

What are cash flows from investing activities?

Answer 27

Cash Transactions for the purchase and sale of investments and long term assets

Question 28

What are cash flows from financing activities?

Answer 28

Cash transactions with lenders and stockholders.