Ch. 1.1 Notes: Financial Statements and Business Decisions

Question 1

Stockholders….

Answer 1

Own part of the company. Or if they are the sole owner then the whole company.

Question 2

Creditors lend…

Answer 2

money to businesses. Banks are an example of a creditor.

Question 3

Creditors make money on the loans by…

Answer 3

Charging interest.

Question 4

Stockholders hope to receive a portion of what the company earns in the form of cash payments called…

Answer 4

Dividends.

And eventually sell the stock (their share of the company) at a higher price than they paid.

Question 5

Stock prices usually rise when…

Answer 5

creditors and investors expect the company to do well in the future.

Question 6

Stockholders and creditors often judge future performance based on information in the company’s…

Answer 6

Financial statements.

Question 7

——— need information about the company’s business activities to manage the operating, investing, and financing of the firm.

Answer 7

Internal Decision Makers.

e.g. managers

Question 8

——— need information about the same business activities to assess whether the company will be able to pay back its debts with interest and pay dividends.

Answer 8

External Decision Makers.

e.g. stockholders and creditors

Question 9

What is an accounting system?

Answer 9

All businesses must have an accounting system.

An accounting system collects and processes financial information about an organization’s business activities and reports that information to decision makers.

Question 10

What business activities are conducted in a business?

Answer 10

• Financing activities: borrowing or paying back money to lenders and receiving additional funds from stockholders are paying them dividends.
• Investing activities: buying or selling items such as plant and equipment used in the production of products.
• operating activities: the day-to-day process of purchasing ingredients from suppliers, manufacturing products, delivering them to customers, collecting cash from customers, and paying suppliers.

Question 11

Define financing activities.

Answer 11

Borrowing or paying back money to lenders and receiving additional funds from stockholders or paying them dividends.

Question 12

Define investing activities.

Answer 12

Buying or selling items such as plant and equipment used in the production of products.

Question 13

Define operating activities.

Answer 13

The day-to-day process of purchasing raw ingredients from suppliers, manufacturing products, delivering them to customers, collecting cash from customers, and paying suppliers.

Question 14

Developing accounting information for internal decision makers is called…

Answer 14

Managerial or management accounting.

Question 15

For a financial accounting course, the focus of discussion is on the perspectives of…

Answer 15

Investors, creditors, and preparers of financial statements.

Question 16

Can managers within a firm make direct use of financial statements?

Answer 16

Yes. For example, marketing managers and credit managers use customers’ financial statements to decide whether to extend credit to their customers.

Supply chain managers analyze suppliers’ financial statements to see whether the suppliers have the resources to meet demand and invest in future development.

Both the employees’ unions and company human resource managers use financial statements as a basis for contract negotiations over pay rates.

Financial statement figures even serve as a basis for calculating employee bonuses.

Question 17

What are the four basic financial statements?

Answer 17

• balance sheet
• income statement
• statement of stockholder’s equity
• statement of cashflows

Question 18

Define balance sheet

Answer 18

Le-Nature’s reports the economic resources it owns and the sources of financing for those resources.

Question 19

Define income statement.

Answer 19

Le-Nature’s reports its ability to sell goods for more than their cost to produce and sell.

Question 20

Define statement of stockholder’s equity.

Answer 20

Le-Nature’s reports additional contributions from or payments to investors and the amount of income the company reinvested for future growth.

Question 21

Define statement of cash flows.

Answer 21

Le-Nature’s reports it’s ability to generate cash and how it was used.

Question 22

When can the four basic financial statements be prepared and for what time span?

Answer 22

• can be prepared at any point in time; e.g. end of the year, quarter, or month.
• can apply to any time span; e.g. one year, one quarter, one month.

Question 23

Financial statements prepared for external users (investors and creditors) at the end of each quarter is known as…

Answer 23

Quarterly Reports

Question 24

Financial statements prepared for external users (investors and creditors) at the end of the year is known as…

Answer 24

Annual Reports

Question 25

What is the purpose of a balance sheet?

Answer 25

To report the financial position (amount of assets, liabilities, and stockholders’ equity) of an accounting entity at a particular point in time.

Question 26

Structure of the heading for a balance sheet:

Answer 26

1. Name of Entity: Le-Nature’s Inc. 2. Title of the statement: Balance Sheet 3. Specific date of the statement: At December 31, 2015. 4. Unit of measure: in millions of dollars

Question 27

On the balance sheet, the ———- itself, not the ———, is viewed as owning the resources it uses and being responsible for its debt.

Answer 27

business entity Business owners

Question 28

———- is like a financial snapshot indicating the entity’s financial position at a specific point in time. In Le-Nature’s case it is December 31, 2015.

Answer 28

The balance sheet

Question 29

Financial reports are normally denominated in the currency of the country in which they are located. U.S. companies report in ————. Mexican companies report in———.

Answer 29

U.S. dollars Mexican pesos

Question 30

Companies that report in millions of dollars can round up the last 6 digits to the nearest million dollars. The listing of Cash $10.6 on Le-Nature’s balance sheet actually means….

Answer 30

$10,600,000

Question 31

What is the basic accounting equation?

Answer 31

Assets = Liabilities + Stockholders’ Equity

Question 32

The basic accounting equation is often called…

Answer 32

The balance sheet equation

Question 33

Define Assets

Answer 33

Economic resources (e.g. cash, inventory, buildings)

Question 34

Define Liabilities

Answer 34

Financing from creditors (e.g. amounts owes to suppliers, employees, banks)

Question 35

Define Stockholders’ Equity

Answer 35

Financing from stockholders (e.g. common stock, retained earnings)

Question 36

The basic accounting equation shows what we mean when we refer to a company’s financial position:

Answer 36

The economic resources that the company owns and the sources of financing for those resources. -How assets, liabilities, and stockholders’ equity are connected.

Question 37

General notes: the exact items listed as assets on a company’s balance sheet depends on the nature of its operations. The four items listed by Le Nature’s are the economic resources needed to manufacture and sell beverages to retailers and vending companies.

Answer 37

- Cash: Le Nature’s first needs cash to purchase land on which to build factories and install production machinery ( property, plant, and equipment) - Inventories: purchasing ingredients and producing beverages - Accounts Receivable: sells beverages on credit and received promises to pay, which is collected in cash later.

Question 38

———- and ————- are the sources of financing for the company’s economic resources.

Answer 38

Liabilities Stockholders’ Equity

Question 39

Liabilities indicate…

Answer 39

- The amount of financing provided by creditors. | - they are the company’s debts and obligations.

Question 40

Under the category of Liabilities, Le-Nature’s lists two items: - accounts payable - notes payable

Answer 40

Accounts payable: the purchase of goods or services from suppliers on credit without a formal written contract (or a note) Notes payable to banks: result from cash borrowing based on a formal written debt contract with banks.

Question 41

Stockholders’ equity indicates…

Answer 41

The amount of financing provided by the owners of the business and reinvesting earnings.

Question 42

A corporation is a business that is incorporated under the laws of a particular state. The owners are called ———— —- ————-. Ownership is represented by ———- —- ———— ——-. that is usually can be bought and sold freely. The corporation operates as a separate legal entity, separate and apart from its owners. The stockholders enjoy limited liability; they are liable for the debts of the corporation only to the extent of their investments.

Answer 42

Stockholders or shareholders Shares of capital stock

Question 43

What is common stock?

Answer 43

The investment of cash and other assets in the business by the stockholders.

Question 44

What is retained earnings?

Answer 44

The amount of earnings (profit) reinvested in the business (and thus not distributed to stockholders in the form of dividends).

Question 45

Total stockholders’ equity is the sum of the…

Answer 45

Common stock + retained earnings

Question 46

Assessment of Le-Nature’s ——- is important to its creditors, Wells Fargo bank and others, and its stockholders because ——— provide a basis for judging whether the company has sufficient resources available to operate. ——- are also important because they could be sold for cash in the event that Le-Nature’s goes out of business.

Answer 46

Assets

Question 47

What provides a basis for judging whether the company has sufficient resources available to operate?

Answer 47

Assets

Question 48

Le-Nature’s —— are important because creditors and stockholders are concerned about whether the company has sufficient sources of cash to pay its ——. Le-Nature’s —— are also relevant to Wells Fargo bank’s decision to lend money to the company because existing creditors share its claim against Le-Nature’s assets. If a business does not pay its creditors, the creditors may force the sale of assets sufficient to meet their claims. The sale of the assets often fail to cover all of the company’s ——, and some creditors may take a loss.

Answer 48

Debts

Question 49

Why is Le-Nature’s stockholders’ equity important to Wells Fargo Bank?

Answer 49

Because creditors’ claim legally comes before those of owners. If Le-Nature’s goes out of business and its assets are sold, the proceeds of that sale must be used to pay back creditors before the stockholders receive any money. Thus, creditors consider stockholders’ equity a protective “cushion.”

Question 50

Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item: Accounts Payable

Answer 50

Liabilities

Question 51

Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item: Accounts Receivable

Answer 51

Assets

Question 52

Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item: Cash

Answer 52

Assets

Question 53

Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item: Common stock

Answer 53

Stockholders’ Equity

Question 54

Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item: Property, plant, and equipment

Answer 54

Assets

Question 55

Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item: Inventories

Answer 55

Assets

Question 56

Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item: Notes Payable

Answer 56

Liabilities

Question 57

Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item: Retained earnings

Answer 57

Stockholders’ Equity

Question 58

The income statement is also known as…

Answer 58

Statement of income Statement of earnings Statement of operations Statement of comprehensive income

Question 59

While the term profit is used widely for this measure of performance, accountants prefer to use the technical term ——- ——- or ——— ———.

Answer 59

Net income Net earnings

Question 60

Le-Nature’s net income measures its success in…

Answer 60

Selling beverages for more than the cost to generate those sales.