Accounting Exam 1

Question 1

What is the purpose of an income statement?

Answer 1

shows how successfully your business performed during a period of time, by subtracting expenses from revenues

Question 2

What is the purpose of a retained earnings statement?

Answer 2

indicates how much of previous income was distributed to owners of the business to allow for future growth

Question 3

What is the purpose of a balance sheet?

Answer 3

presents a picture at a point in time of what your business owns (assets) and what it owes (liabilities)

Question 4

What is the purpose of a statement of cash flows?

Answer 4

shows where the business obtained cash during a period of time and how that cash was used

Question 5

What does an income statement report?

Answer 5

it reports expenses, revenues, and net income or loss/profit

Question 6

Does an income statement report during a period of time or at a point in time?

Answer 6

during a period of time

Question 7

Amounts received by a company for issuing stock are NOT considered what?

Answer 7

it is NOT considered revenue

Question 8

Dividends paid to owners of a company are NOT considered what?

Answer 8

they are NOT considered expenses

Question 9

What are retained earnings?

Answer 9

the net income retained in a company

Question 10

What does a retained earnings statement report?

Answer 10

it shows the amounts and changes in retained earnings over a period of time

Question 11

How is retained earnings calculated?

Answer 11

the beginning retained earnings is added to net income, deducting dividends

Question 12

What happens on a retained earnings statement when there is net loss in a company?

Answer 12

the net loss amount is deducted in the retained earnings statement

Question 13

What do financial statement users evaluate when looking at a statement of retained earnings?

Answer 13

they evaluate dividend payment practices

Question 14

What does a balance sheet report?

Answer 14

it reports assets and claims to assets at a specific point in time

Question 15

What two categories are assets subdivided into?

Answer 15

claims of creditors and claims of owners

Question 16

What is another word for claims of creditors?

Answer 16

liabilities

Question 17

What is another word for an owner’s claim to assets?

Answer 17

stockholder’s equity

Question 18

What is the accounting equation?

Answer 18

assets = liabilities + stockholder’s equity

Question 19

What two things comprise stockholder’s equity?

Answer 19

common stock and retained earnings

Question 20

What results when a company sells new shares of stock?

Answer 20

common stock

Question 21

What does a statement of cash flows report?

Answer 21

to provide financial information about cash receipts and cash payments of a business for a period of time, and the amount of cash at the end of the period

Question 22

What three types of activities are shown in a statement of cash flows?

Answer 22

Operating, financing, and investing activities

Question 23

How are the four financial statements interconnected?

Answer 23

retained earnings sheet uses the result of the income statement, the result of the retained earnings statement is used in the balance sheet, and the result of the cash flows statement is used in the balance sheet

Question 24

What is an Auditor?

Answer 24

someone who checks the work of the accountant to make sure the numbers are correct

Question 25

What is included in an annual report?

Answer 25

the financial statements, auditor's reports

Question 26

What does a management discussion and analysis (MD&A) present?

Answer 26

ability to pay near-term obligations, ability to fund operations and expansion, results of operation

Question 27

What are notes to the financial statements that are included in an annual report?

Answer 27

explanatory notes and supporting schedules

Question 28

Liquidity

Answer 28

how easily something can be turned into cash

Question 29

What is a sole proprietorship?

Answer 29

a business with one owner

Question 30

What is a partnership?

Answer 30

when a business has two or more owners

Question 31

What is a corporation?

Answer 31

a separate legal entity for which evidence of ownership is provided by shares of stock

Question 32

What is the expanded accounting equation?

Answer 32

assets = liabilities + common stock + revenue - expenses - dividends

Question 33

Why are expenses and dividends shown with negatives in expanded accounting equation charts?

Answer 33

because the equation needs to balance visually

Question 34

What is common stock?

Answer 34

an owners claim to business

Question 35

What are dividends?

Answer 35

the distribution of cash to stockholders

Question 36

What does GAAP stand for?

Answer 36

generally accepted accounting principles

Question 37

How do you calculate net income?

Answer 37

Net income = revenue - expenses

Question 38

What does it mean if net income is negative?

Answer 38

there is net loss

Question 39

What does depreciation mean?

Answer 39

equipment being used up

Question 40

How do you calculate ending retained earnings?

Answer 40

Ending retained earnings = beginning balance + net income - dividends

Question 41

What are assets?

Answer 41

resources owned by the business, something that can provide future benefits

Question 42

What are operating activities?

Answer 42

cash from customers, cash to suppliers/employees

Question 43

What are investing activities?

Answer 43

the purchase/sale of long-term assets

Question 44

What are financing activities?

Answer 44

the borrowing and paying back of money and selling of stock

Question 45

What is a bond?

Answer 45

when a company borrows money from people or companies

Question 46

What is unearned revenue?

Answer 46

revenue that is acquired without providing a good or service

Question 47

What are the three accounting principles and assumptions?

Answer 47

1) economic entity assumption - the business and owners must be kept separate 2) Monetary unit assumption - we record transactions we can express monetarily 3) Historical cost principles - record assets at their cost (with some exceptions)

Question 48

What makes information useful?

Answer 48

correctness, relevance, decision making, reliability