CHAPTER 1 REC QUESTIONS

Question 1

heading of financial statements

Answer 1

a) Name of the entity
(b) Title of the statement
(c) Specific date or the period of time it covers
(d) Unit of measure

Question 2

importance of assets to investors and creditors

Answer 2

• basis for Judging - Sufficient resources are available to operate the company

Question 3

importance of liabilities to investors and creditors

Answer 3

• company must be able to generate sufficient cash from operations
• or seek further borrowing to meet the payments required by debt agreements

Question 4

net earnings

Answer 4

excess of total revenues over total expenses

Question 5

net loss

Answer 5

excess of total expenses over total revenues

Question 6

Accounting equation for the Statement of Earnings

Answer 6

Revenue - Expenses = Net Earnings
- Revenues: sales to customers, regardless of the timing of collection of cash from customers
- Expenses: monetary value of resources the entity used up, consumed to earn revenues during the period

Question 7

Three major items reported on the statement of earnings

Answer 7

revenue, expenses, net earnings

Question 8

Accounting equation for the statement of financial position

Answer 8

assets = liabilities + shareholders’ equity

Question 9

Three major components reported on the statement of financial position

Answer 9

• Assets: probable (expected) future economic benefits owned by entity as a result of past transactions. Resources owned by the business at a given point
• Liabilities: probable (expected) debts or obligation of the entity as a result of past transactions - will be discharged with assets or services in the future
• Shareholders’ equity: financing provided by owners of the business and by the net earnings generated from the operations of the business.

Question 10

Shareholders’ equity might be thought of as

Answer 10

residual interest because it represents assets minus liabilities

Question 11

Accounting equation for retained earnings

Answer 11

Beginning retained earnings + net earnings - dividents = ending retained earnings

Question 12

Major items that affect the ending balance of retained earnings

Answer 12

• Begin with: beginning of the year retained earnings
• net earnings reported on the statement of earnings is added
• dividends declared are subtracted

Question 13

Accounting standards in Canada

Answer 13

• securities commisions to regulate Canadian capital markets + flow of fin. info
• promoting accounting practices

Question 14

OSC

Answer 14

Ontario Securities Commission

Question 15

AcSB

Answer 15

Accouting Standards Board
responsible for establishing standards of accounting and reporting by Canadian companies and not-for-profit organization

Question 16

IFRS

Answer 16

International Financial Reporting Standards
Guidelines for the measurement rules used to develop the information in financial statements

Question 17

CPA

Answer 17

Charted professional accountant

Question 18

Audit

Answer 18

An examination of the financial reports to ensure that they represent what they claim and conform with international financial reporting standards.

Question 19

Sole proprietorship

Answer 19

An unincorporated business owned by one person

Question 20

Corporation

Answer 20

An incorporated entity that issues shares as evidence of ownership

Question 21

Accounting

Answer 21

The Collection and processing (analyzing, measuring and recording) of useful financial information about an organization, and reporting it to decision makers

Question 22

Accounting entity

Answer 22

The organization for which financial data are to be collected

Question 23

Audit report

Answer 23

A report that describes the auditor’s opinion of the fairness of the financial statement presentations and the evidence gathered to support that opinion.

Question 24

Publicly traded

Answer 24

A company with shares that can be bought and sold by investors on established stock exchanges

Question 25

Unit of measure

Answer 25

Measurement of information about an entity in terms of the dollar or other national monetary unit

Question 26

Partnership

Answer 26

An unincorporated business owned by two or more persons

Question 27

# alt. name Income statement

Answer 27

statement of earnings statement of operations

Question 28

# alt. name balance sheet

Answer 28

statement of financial position

Question 29

# alt. name cash flow statement

Answer 29

statement of cash flows

Question 30

The purpose of the income statement is

Answer 30

to present information about the revenues, expenses, and the net income of an entity for a specified period of time

Question 31

Dividends payable

Answer 31

- amount of cash that a company owes to its shareholders after declaring a dividend - investors can use dividends payable to measure how much cash a company is returning to its shareholders and how it affects its liquidity

Question 32

Retained earnings

Answer 32

- accumulated net income that a company has not distributed to shareholders ad dividends. - Investors can use retained earnings to assess how a company is using its profits over time

Question 33

total assets

Answer 33

- sum of all the resources that a company owns or controls - investors can use total assets to measure how large and diversified a company is, as well as how efficiently it uses its resources to generate income.

Question 34

Net earnings of first year of operations when no dividends were declared

Answer 34

=> retained earnings consists entirely of the net eanings for the first year.

Question 35

Net earnings positive in statement of earnings indicate that

Answer 35

- company is profitable - net earnings does not reflect the amount of cash available at the end of the period - but the cash transactions indicate that the cash available is sufficiently large to cover the cost of the cash register.