Topic 2 Flashcards
(15 cards)
What is the purpose of financial statements?
To provide useful financial information to investors, lenders, and stakeholders for decision-making.
What does it mean that financial statements articulate?
The financial statements are interconnected and explain changes across periods, such as income affecting retained earnings.
What are notes to financial statements?
Explanatory information accompanying financial statements, disclosing accounting policies, assumptions, and estimates.
What is the purpose of an external audit?
To provide assurance that the financial statements fairly reflect the company’s financial position.
What are the four main financial statements?
1) Balance Sheet, 2) Income Statement, 3) Statement of Cash Flows, 4) Notes to the Financial Statements.
What is the accounting equation?
Assets = Liabilities + Owners’ Equity.
What is the formula for the PE (Price-Earnings) ratio?
Price per Share ÷ Earnings per Share (EPS).
If a company has $300M in liabilities and $100M in equity, what are the total assets?
$400 million.
When is revenue recognized under accrual accounting?
When the service is provided, regardless of when cash is received.
What activity is ‘cash received from investors’ on the statement of cash flows?
Financing activity.
Where are accounting policies disclosed?
In the notes to the financial statements.
What activity is ‘purchase of plant assets’ on the cash flow statement?
Investing activity.
Why is GAAP important?
It ensures comparability and transparency of financial data.
Why are notes to financial statements essential?
They provide necessary context and detail that cannot be conveyed in the statements alone.
What does an external audit provide?
Assurance of fair representation, not a guarantee of profits or cash flow.
