Chapter 2

Question 1

name of the 4 financial statements

Answer 1

balance sheet
income statement
statement of change of stockholder´s equity
statemenet of cash flow

Question 2

what does the balance sheet include

Answer 2

assets = liabilities + common stock + ending retained earnings

Question 3

what does an income statement include

Answer 3

revenue - expenses = Net income (loss)

Question 4

what does a statment of change of stockholder´s equity include

Answer 4

beginning retained earnings + net income - dividends + beginning common stock + additional contribution received from owners = total stockholder´s equity

Question 5

what does a statement of cash flow include

Answer 5

cash inflow and outflow of operations, investments and financial actions

Question 6

what are the two formats to prepare an income statement

Answer 6

simple income statement

multiple step income statement

Question 7

what is the difference between balance sheets and the other 3 financial statements

Answer 7

balance sheet shows assets, liabilites and stockholder´s equity at one specific date
the other 3 finanical statements show a beginning and ending period

Question 8

what does on account mean

Answer 8

buying or selling something on credit

Question 9

what are account payable

Answer 9

amounts that the company owes to a vendor

Question 10

und which category of a balance sheet do accounts payable fall

Answer 10

liabilities

Question 11

what are credit payments called to somebody else except a vendor

Answer 11

other payables

Question 12

what is prepaid insurance

Answer 12

an insurance the comapny paid in advance for but didn´t make use of it yet

Question 13

what are accounts receivable

Answer 13

amounts customers owe a company for good purchased on credit

Question 14

what does adjusting the books in relation to an finincail statement mean

Answer 14

make changes in accounting records, just before fin. statements are prepared

Question 15

why do adjustments need to be made

Answer 15

to reflect the correct financial conditions of a company at the time

Question 16

what part of retained earnings is not included in an income statement

Answer 16

devidends

Question 17

what are the categoeries as which transactions are listed in a statement of cash flow

Answer 17

operating
investing
financing

Question 18

what are dividends categorized as in a statement of cash flow

Answer 18

financing cash flow

Question 19

what is part of a complete fniancial statement in addition to 4 statements

Answer 19

notes

Question 20

what are current assets

Answer 20

assets that are used and turned into cash within a year

Question 21

what is liquidity

Answer 21

measure of how quickly assets can be turned into cash

Question 22

what are noncurrent assets

Answer 22

assets that a company will not be used within a year

also called long-tern assets

Question 23

current liabilities

Answer 23

liabilities the company will pay off within the next fiscial year

Question 24

noncurrent - longturn liabilites

Answer 24

paying off of liabilities takes longer than a year

Question 25

what does a classified balance sheet show

Answer 25

subtotals for many items (e.g. current assets and liabilities)

Question 26

what are the two ways owners can create equity in a company

Answer 26

making a capital contribution - buying stock | create profit - increases equity

Question 27

what principle does accrual accounting follow

Answer 27

matching principle

Question 28

what does accrual accounting refer to

Answer 28

companies recognize revenue whne it is earned and expences when they are incurred - no matter when the cash is receiverd or disturbed

Question 29

what are the two different types of accrual basis accounting

Answer 29

accruals | deferrals

Question 30

what can be understood as accrual

Answer 30

action first - money later | revenue is earned or expense is incurred before exchange of cash

Question 31

what form of assets is often recorded related to accruals

Answer 31

accounts receivable

Question 32

what are deferrals

Answer 32

money first - action later | exchange of cash before revenue is earned or expense is incurred

Question 33

example for a deferral

Answer 33

payment of insurance

Question 34

what is another type of accounting called

Answer 34

cash basis accounting

Question 35

main idea of cash basis accounting

Answer 35

revenue only recognized when cash is collected | expenses are recognized when cash is disbursed

Question 36

problem with cash basis accounting

Answer 36

it is not accepted by GAAP and SEC

Question 37

most common ratio to measure company´s short term obligations

Answer 37

current ratio

Question 38

equation of current ratio

Answer 38

current assets/current liabilities

Question 39

internal controls

Answer 39

company´s policies to protect assets and to ensure accuracy of accounting records

Question 40

major contol types in company´s accounting system

Answer 40

preventive control - stop errors before they happen detective control - find errors before they damage anything corrective control - fix errors