Lecture 1 - Accounting and Financial Statements (Chapters 1 and 4) Flashcards
Financial statements, business structures, assets, liabilities, and equity, income and expenses
What four financial statements are the core of financial accounting?
- Income statement
- Balance sheet (also referred to as “Statement of financial position”)
- Cash flow
- Changes in equity
What’s the definition of an income statement?
“A report that shows a company’s revenues, expenses, and profits or losses during a given fiscal year.” (ChatGPT)
What’s the definition of a balance sheet?
“A report that shows a company’s financial condition during a given fiscal year. It includes assets (what the company owns), liabilities (what the company owes), and shareholders’ equity (the owners’ interest in the company).” (ChatGPT)
What’s the definition of a cash flow statement?
“A report that shows a company’s inflows and outflows during a given fiscal year; separated into operating, investing, and financing activities.” (ChatGPT)
What’s the definition of a statement of changes in equity?
“A report that shows how a company’s equity has changed during a given fiscal year. It includes changes due to net income, dividends, share issuances, and repurchases.” (ChatGPT)
Account for the three main business structures.
- Proprietorship
- Partnership
- Corporation
What’s the definition of a proprietorship?
“A business that’s owned and operated by one person. The owner has full control, but also has unlimited personal liability for the business’ debts and obligations.” (ChatGPT)
What’s the definition of a partnership?
“A business that’s owned and operated by two or more people. The owners share profits, losses, and management decisions. This type of business structure can be either general or limited.” (ChatGPT)
What’s the definition of a corporation?
“A business that’s owned by shareholders. The shareholders have limited liability, i.e. they’re not personally responsible for the corporation’s debts and obligations.” (ChatGPT)
What five elements are the core of financial statements?
- Assets
- Liabilities
- Equity
- Income
- Expenses
Where are assets, liabilities, and equity reported?
In a company’s balance sheet.
Where are income and expenses reported?
In a company’s income statement.
What does “the basic accounting equation” show?
The relationship between a company’s assets, liabilities, and equity.
Account for “the basic accounting equation”.
Assets = Liabilities + Equity
How do you calculate equity?
Equity = Assets - Liabilities
What does “net income” mean?
The amount of money that’s left after subtracting total expenses from total revenue. A positive result means that the company made a profit, while a negative result means that the company lost money.
What does “net loss” mean?
The amount of money that’s left after subtracting total revenue from total expenses. A positive result means that the company lost money, while a negative result means that the company made a profit.
Account for the three types of business activities that companies engage in.
- Operating
- Investing
- Financing
Does income increase or decrease a company’s assets? What accounts are affected?
Income increases assets, usually “Cash” or “Accounts receivable”.
Does income increase or decrease a company’s equity? What accounts are affected?
Income increases equity, usually “Retained earnings”.
Do expenses increase or decrease a company’s assets?
Expenses decrease assets.
Do expenses increase or decrease a company’s equity?
Expenses decrease equity.
What does it mean when an asset is short-term/current?
It means that the asset is expected to be converted to cash or sold within the following 12 months.
What does it mean when an asset is long-term/non-current?
It means that the asset is expected to be profitable for the company beyond the following 12 months.
