General MUST KNOW

Question 1

Indirect method for

The Statement of Cash Flow

Answer 1

∆Cash= Liability + Equity - non current assets - longterm assets

Question 2

Current Liability - 9

Answer 2

(+) current liability
is an obligation that is payable within one year.
o Accounts payable: bills or invoices from suppliers
o Salary/wages payable
o Taxes
o Interest payable
o Inventory
o Short-term loans (Notes Payable)
o Current Maturities of long-term debt: Portion of a
long-term liability that will be paid within one year
(Example: Mortgage)
o Contingent liabilities
o Accrued expenses

Question 3

Equity

5

Answer 3

(+) Equity
Net income 
o	(retained earnings + div.)
o	Depreciation expense (+)
Capital stock
Funds

Question 4

Non-current asset

5

Answer 4

(-) Non-current asset
a company’s long-term investments for which the full value will not be realized within the accounting year.

Long-term investments
- Tangible assets (Property, plant and equipment)
- Intangible assets
o Intellectual property, copyrights, trademarks, royalty
Prepaid rent
Insurance
Goodwill (willingness of a company to pay more than the fair value of the other companies net assets  might be worth more in the future)

Question 5

Long-term assets

3

Answer 5

(-) Long-term assets
Equipment
Land
Building

Question 6

Contra account:

Answer 6

Depreciation Expense - Accumulated Depreciation

Allowance for Doubtful Accounts - Accounts Receivable

Question 7

Receivable
vs
Payable

Answer 7

Receivable are the amounts owed to a company by its customers

Payable are the amounts that a company owes to its suppliers

Question 8

Why Stock dividends and not Cash Dividends

Answer 8

It is cash preserving (doesn’t touch the cash balance)

Having more shares outstanding will drive down the price = increase the share price

Tax benefit for shareholders (cash dividends are taxable income, shares are not)

Question 9

Stock split:

Answer 9

affect the par value of the stocks.

- Ex. a 2-to-1 stock split divide the par value by 2.

Question 10

Contingent liability:
vs
Contra liability:

Answer 10

Contingent liability: potential obligation that may arise from an uncertain future event (Lawsuit)

Contra liability: offset the discount/ of shares sold (Discount on Bonds Payable)

Question 11

Current assets: (5)

can be turned into cash in a year or less

Answer 11

Cash
Accounts receivable (prepayments)
Inventory
Marketable securities (treasury bills, commercial papers)
Short-term investment (stocks and shares)

Question 12

Non-current liability - 4

Answer 12

financial obligations of a company that will come due in a year or longer.

o long-term ‘Notes payable’ loan from banks (interest rate
comes on top)
o bonds (money raised by the public)  not that flexible
compared to long-term loans
o Employee pension
o Deferred income tax