Financial Accounting Week 1

Question 1

What is the purpose of financial accounting?

Answer 1

To provide meaning, quantitative financial information

Question 2

Who are the two most relevant decision-makers with financial accounting information?

Answer 2

Shareholders and debt holders

Question 3

What “decision-makers” that are using financial accounting information are typically seen as the owners?

Answer 3

Shareholders

Question 4

What “decision-makers” using financial accounting information are typically seen as the creditors?

Answer 4

Debt holders

Question 5

What two attributes make financial information useful?

Answer 5

The relevance and faithful representation

Question 6

What does GAAP stand for?

Answer 6

Generally accepted accounting principles

Question 7

What does the SEC stand for?

Answer 7

Securities and exchange commission

Question 8

What does the AICPA stand for?

Answer 8

The American Institute of certified public accountants

Question 9

What are the five required financial statements for financial accounting information?

Answer 9

• Balance sheet
• Income Statement
• Statement of Shareholder’s Equity
• Statement of Cash Flows
• Statement of Comprehensive Income

Question 10

What is a balance sheet in reference to financial accounting?

Answer 10

A sheet that describes the sources and uses of funds at a firm point in time.

Question 11

What is an income statement in reference to financial accounting?

Answer 11

The document that shows how much money a company has earned (not cash) over a
period of time.

Question 12

How is a balance sheet helpful within financial accounting?

Answer 12

• evaluates capital structure
• assesses risk and future cash flow

Question 13

How is an income statement helpful with financial accounting?

Answer 13

• helps evaluate past performance
• useful and predicting a firms future performance
• assess risk of uncertainty or risk in achieving future cash flows

Question 14

What is an asset?

Answer 14

An economic resource that is owned or controlled

Question 15

Within financial accounting: what does cash, accounts receivable, inventory, land, buildings, equipment, copyrights, or investments refer to?

Answer 15

Assets

Question 16

What stipulations must an asset have to be reported on a balance sheet?

Answer 16

They must be owned or controlled by the company and they must possess expected future economic benefits

Question 17

What two ways are assets reported to have value?

Answer 17

Historical cost or market value

Question 18

Can you report assets within financial accounting that are not reliably measured?

Answer 18

No, you may only include assets that can be reliably measured

Question 19

What are liabilities within financial accounting?

Answer 19

They are future obligations to pay cash, transfer assets, or provide services to another party

Question 20

What is owners equity within financial accounting?

Answer 20

Ownership interest in the net assets of an entity

Question 21

What accounts comprise a balance sheet?

Answer 21

Assets, liabilities, owners equity

Question 22

What formula do balance sheets use?

Answer 22

Assets = liabilities + owners equity

Question 23

How are assets ordered in a balance sheet?

Answer 23

assets are listed in order of the liquidity, ascending in order of how quickly they can be converted to cash

Question 24

How quickly would you have to convert an asset to cash for it to be considered a current asset?

Answer 24

Within a year

Question 25

How quickly would a liability have to mature for it to be considered a current liability?

Answer 25

Less than one year

Question 26

In what order are liabilities listed on balance sheets?

Answer 26

Liabilities are listed in order of maturity, assending in time for maturity

Question 27

What is the equation for retained earnings?

Answer 27

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

Question 28

What are revenues within an income statement?

Answer 28

An increase in a companies resource from the sale of goods or services

Question 29

What are expenses with an income statement?

Answer 29

Costs incurred in the normal course of business to generate revenue

Question 30

What are gains/losses within an income statement?

Answer 30

Money made or lost outside of normal firm operations

Question 31

What is net income or loss?

Answer 31

An overall measure of the performance of a company

Question 32

What is a statement of shareholders equity in reference to financial accounting?

Answer 32

The statement of equity is a reconciliation of the beginning and ending balances of shareholders equity accounts

Question 33

What is a statement of cash flow in reference to financial accounting?

Answer 33

A statement that describes an entities cash inflows, and cash out flows during a period

Question 34

What three sections are included within a statement of cash flows?

Answer 34

- operating activities - investing activities - financing activities

Question 35

What are operating activities within the statement of cash flows?

Answer 35

Cash transactions that enter into the determination of net income

Question 36

What are investing activities within the statement of cash flows?

Answer 36

Cash transactions involved in the purchase and sale of PPE, other long-term assets, and making/collecting loans

Question 37

What are financing activities within the statement of cash flows?

Answer 37

Cash transactions, whereby resources are obtained or repaid to owners and creditors

Question 38

What are the four steps of the accounting cycle?

Answer 38

1. Analyze transactions 2. Record effects of transactions 3. Summarize effects of transactions by account 4. Prepare reports

Question 39

What is a transaction in reference to financial accounting?

Answer 39

An event that causes a change in balance sheet values

Question 40

What is an account in reference to financial accounting?

Answer 40

An accounting record in which the results of transactions are accumulated

Question 41

What is double entry accounting in reference to financial accounting?

Answer 41

A method of accounting that includes debts and credits

Question 42

What is accrual accounting?

Answer 42

A system of accounting in which revenues and expenses are recorded as they are earned and incurred, not necessarily when cash changes hands

Question 43

What is revenue recognition?

Answer 43

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive an exchange for those goods or services

Question 44

What is the matching principle within financial accounting?

Answer 44

All costs and expenses incurred in generating revenues must be recognized in the same period as the revenue.

Question 45

What are T-Accounts?

Answer 45

A place to accumulate the effect of journal entries on each account.