chapter two notes

Question 1

what are the qualitative characteristics of useful information?

Answer 1

understandability
relevance
comparability
consistency
faithful representation
materiality
conservatism

“u r close. can faith move circles?”

Question 2

understandability

Answer 2

information should be compressible to those who are willing to spend the time to understand it

Question 3

relevance

Answer 3

information makes a difference in decision making

Question 4

faithful representation

Answer 4

complete, neutral, free from error

Question 5

comparability

Answer 5

BETWEEN COMPANIES similar methods have been applied (ex: GAAP)

Question 6

consistency

Answer 6

BETWEEN PERIODS within the same company

Question 7

materiality

Answer 7

the size of the transaction makes a difference in how it gets recorded

Question 8

conservatism

Answer 8

never want to overstate assets/revenues or understate liabilities/expenses

Question 9

objectives and qualitative characteristics of financial reporting are now ____ _____ for IASB and FASB.

Answer 9

the same

Question 10

classified balance sheet

Answer 10

what obligations will be due and what resources will be available to meet those obligations

Question 11

current assets

Answer 11

could be converted into cash, sold, or used up during a current period (12 months)

Question 12

what is the order that current assets should be reported?

Answer 12

1. cash
2. marketable securities
3. accounts receivables
4. inventory
5. prepaid expenses
   ORDER OF LIQUIDITY

“cash means an income proved”

Question 13

long term investments

Answer 13

investments in stocks and bonds of other companies to be held for more than one year

Question 14

plant, property and equipment (fixed assets)

Answer 14

acquired for use in business rather than resale to customers

Question 15

what are some PPE accounts?

Answer 15

1. land
2. buildings
3. equipment, vehicles, furniture
4. (-)accumulated depreciation

Question 16

intangible assets

Answer 16

1. patent (sell)
2. copyright (artistic)
3. trademark/tradename
4. franchise/license (area)
5. goodwill

Question 17

goodwill

Answer 17

when a company pays more than fair value of the assets of another company to purchase it

Question 18

what is the order of assets recorded in a classified balance sheet?

Answer 18

1. current assets
2. long term investments
3. fixed assets
4. intangible assets

Question 19

current liabilities

Answer 19

requires the use of current assets to settle within the next 12 months

Question 20

what order to you record current liabilities?

Answer 20

1. accounts payable
2. accrued expenses
3. unearned revenue
4. short term note payable
   ORDER OF MATURITY

“accountants are usually short”

Question 21

long term liabilities

Answer 21

notes payable, bond payable, mortgage payable

Question 22

stockholder’s equity

Answer 22

claimed of owners against the net assets of the firm

common stock and retained earnings

Question 23

what is one of the uses of the balance sheet?

Answer 23

to measure/analyze liquidity

Question 24

working capital

Answer 24

helps to measure liquidity

CURRENT ASSETS-CURRENT LIABILITIES

Question 25

current ratio

Answer 25

useful to compare liquidity among companies | CURRENT ASSETS/CURRENT LIABILITIES

Question 26

what are the limitations of the balance sheet?

Answer 26

historical cost vs fair market value | only a number is recorded

Question 27

what is the order of a multi-step income statement?

Answer 27

``` revenues - cost of goods sold =gross profit - operating expenses =income from operations + gains/interest revenue - losses/interest expense =net income ```

Question 28

gross profit

Answer 28

revenues-cost of goods sold

Question 29

income from operations

Answer 29

gross profit-operating expenses

Question 30

net income

Answer 30

income from operations+gains-losses+interest revenue-interest expense

Question 31

what are some of the uses of income statement?

Answer 31

to analyze profitability

Question 32

gross profit ratio

Answer 32

gross profit/sales

Question 33

profit margin (return on sales)

Answer 33

net income/sales

Question 34

what is the purpose of the statement of retained earnings?

Answer 34

shoes how net income and dividends causes change in a company's financial position during a period of time

Question 35

what is the formula for ending retained earnings when there are NO changes in a company's stock during the period?

Answer 35

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

Question 36

what is the purpose of the statement of stockholder's equity?

Answer 36

shows how net income, dividends, and changes in stock causes change in a company's financial position during a period of time

Question 37

what is the formula for ending retained earnings when there ARE changes in a company's stock during the period?

Answer 37

beginning stockholder's equity +new stock (change in stock) +net income (change in re) -dividends

Question 38

what are the elements of annual reports?

Answer 38

1. letter from president or chairman of the board of directors 2. description of products 3. financial section 4. independent auditor's report

Question 39

what is the order of the financial section of the annual report?

Answer 39

1. management report 2. financial statements 3. notes to financial statements (footnotes)

Question 40

what is the majority of the annual report?

Answer 40

footnotes (everything that isn't in the financial statements, but is relevant to decision makers) FULL DISCLOSURE

Question 41

unqualified opinion

Answer 41

what everyone hopes for, attests that financial statements are fair in accordance to GAAP

Question 42

qualified opinion

Answer 42

for the most part they are following GAAP