Topic 2 Overview of Financial Statements

Question 1

3 Primary Financial Statements

Answer 1

The Balance Sheet
The Statement of Cash Flows
The Income Statement

Question 2

Balance Sheet

Answer 2

presents the financial position of a company at a particular point in time
Sometimes called a statement of financial position

Question 3

Assets

Answer 3

firm’s economic resources, formally defined as the “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Question 4

Liabilities

Answer 4

the future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events.

Question 5

Stockholder’s equity

Answer 5

aka shareholder’s equity
the portion of the balance sheet that represents the capital received from investors in exchange for stock (paid-in capital) donated capital and retained earnings

Question 6

Owner’s Equity

Answer 6

portion of the assets that the owners of the organization can really call their own.

Question 7

Liquidity

Answer 7

ease with which the item can be turned into cash.

Question 8

Net Assets

Answer 8

total assets minus total liabilities. In a sole proprietorship the amount of net assets is reports as wonder’s equity. In a corporation the amount the of net assets is reported as stockholders’ equity.

Question 9

Proprietorship

Answer 9

business owned b one person who almost always also manages the business. . mere extension of the owner, who is personally responsible for all the activities and obligations of the business

Question 10

Partnership

Answer 10

business association of two or more individuals. Partners generally mange the business as well as own it and are personally responsible for all the obligations of the business.

Question 11

Corporation

Answer 11

business that is chartered (incorporated) as a separate legal entity under the laws of a particular state or country.
operations and obligations of the business are legally separated from the personal affairs on the owners.

Question 12

Paid-in Capital

Answer 12

the value of the assets given in exchange for the shares of stock

Question 13

Retained Earnings

Answer 13

represent the portion of stockholders’ equity (resulting from cumulative profitable operations- that has not been paid to the owners as dividends

Question 14

Treasury Stock

Answer 14

shown as a subtraction in the stockholders’ equity section of the balance sheet

Question 15

Classified Balance Sheet

Answer 15

balance sheet that distinguishes between current and long-term assets

Question 16

Accounting Equation

Answer 16

Assets= Liabilities + Owners’ Equity

Question 17

Entity Concept

Answer 17

idea that personal financial activity is kept separate from business financial activity

Question 18

Historical Cost Convention

Answer 18

an accounting technique that values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition.

Question 19

Book Value

Answer 19

asset’s cost minus the asset’s accumulated depreciation

Question 20

Going Concern Assumption

Answer 20

allows the readers of financial statements to assume that the company will continue on long enough to carry out its objectives and commitments

Question 21

Long-Term Liability (Example)

Answer 21

Mortgage Payable

Question 22

Income Statement

Answer 22

company’s financial performance for a specified period of time
AKA Statement of financial position

Question 23

Revenue

Answer 23

amount of assets created through the performance of business operations.
an increase from the sale of goods and services

Question 24

Expenses

Answer 24

amount of assets consumed from the performance of business operations
Opposite of revenues
generally, cause a decrease in net assets

Question 25

Dividends

Answer 25

not considered expenses but rather as a distribution fo profits to the owners (never appear on the income statement)

Question 26

Gains and Losses

Answer 26

money made or lost on activities outside the normal business of a company

Question 27

Net Income or Net Loss

Answer 27

difference between revenues and expenses

represents the accountant’s best effort to measure the economic performance of a company for a specific period of time.

Question 28

Earnings per share (EPS)

Answer 28

tells the owner of one share of stock how much of the net income belongs to them.

Question 29

Time Period Concept

Answer 29

concept that a business should report the financial results of its activities over a standard period, which is usually monthly, quarterly, or annually.

Question 30

Revenue Recognition

Answer 30

generally accepted accounting principle (GAAP) that determines the specific conditions in which revenue is recognized or accounted for

Question 31

Statement of Cash Flows

Answer 31

individual cash flow items that are classified according to three main activities: operating, investing, and financing

Question 32

Operating Activities

Answer 32

activities involved in producing and selling goods and services and this comprise the day-to-day business of a company.

Question 33

Operating Cash Outflows

Answer 33

payments to purchase inventory and to pay wages, taxes, interest, utilities, rent, and similar expenses.

Question 34

Investing Activities

Answer 34

the purchase and sale of land, buildings, and equipment. Also includes buying and selling stocks of other companies

Question 35

Financing Activities

Answer 35

activities whereby cash is obtained from, or repaid to, owners and creditors

Question 36

Notes to financial statements

Answer 36

provide additional information pertaining to a company’s operations and financial position and are considered to be an integral part of the financial statements

Question 37

4 general types of Financial Statement Notes

Answer 37

• Summary of significant accounting policies
• Additional information about the summary totals found in statements
• Disclosure of important information not recognized in the statements
• Supplementary information required by the FASB or the SEC

Question 38

Recognition

Answer 38

a breaking down of all the estimates and judgments into one number and reporting that number in the financial statement

Question 39

Disclosure

Answer 39

accepted way to convey information is users when the information is too uncertain to be able to be boiled down into one concrete number.

Question 40

External Audit

Answer 40

provide an external check- subject their financial statements to an external audit by a public accounting firm.

Question 41

Relevance

Answer 41

a qualitative characteristic in accounting. Relevance is associated with information that is timely, useful, has predictive value, and is going to make a difference to a decision maker.

Question 42

Reliability

Answer 42

a qualitative characteristic in accounting. It is achieved when information is verifiable =, objective (not subjective) and you can depend on it.

Question 43

Comparability

Answer 43

Information that becomes much more useful when it can be related to a benchmark or standard.

Question 44

Conservatism

Answer 44

a pervasive factor in accounting can be summarized as follows: When in doubt, recognize all losses but don’t recognize any gains

Question 45

Consistency

Answer 45

the consistency principle states that once youadopt an accounting principle or mrthod, contune to follow it consistently in future accoutning periods

Question 46

Materiality

Answer 46

the question of whether an item is large enoguh to make a difference to anyone

Question 47

Articulation

Answer 47

the idea that certain figures on an operating statement help to explain changes in figuress on compararitive balance sheets