1-1 General-Purpose Financial Reporting

Question 1

Financial Accounting

Answer 1

The way companies identify, measure, and communicate financial information to external users

Question 2

External financial statement users

Answer 2

Those who rely on companies’ financial statements and related information to make economic decisions

Question 3

Financial Reporting

Answer 3

The process of communicate financial information to external financial statement users

Question 4

Financial Statements

Answer 4

The statement of comprehensive income (income statement), balance sheet (statement of financial position), statement of of stockholder’s equity, statement of cash flows

Question 5

What is the objective of financial reporting as stated by the Statement of Financial Accounting Concepts?

Answer 5

To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity

Question 6

General-Purpose Financial Reports

Answer 6

Not designed to show the value of the reporting entity, but provide information to assist existing and potential investors and creditors in assessing performance and estimating the value of an entity

Question 7

What is financial reporting focused on?

Answer 7

The needs of existing and potential investors (shareholders) and creditors (lenders).

Question 8

What is the impact of financial reporting for investors?

Answer 8

Reported earnings is positively related with the stock price

Question 9

What is the impact of financial reporting on creditors?

Answer 9

Ratings agencies indicate level of risk by the financial ratios
These ratings are used by creditors to price debt

Question 10

Accrual Accounting

Answer 10

Requires that an event that alters the economic status of a company be recognized in the period in which the even occurs rather than in the period when cash changes hands

Question 11

Why do internal management reports not have to follow GAAP?

Answer 11

The reports are often confidential and only used for internal managers and their decision-making needs

Question 12

What is a MD&A on a 10-K?

Answer 12

“Management’s Discussion and Analysis of Financial Condition and Results of Operations”

Focuses on the company’s operations and financial results, including the areas of liquidity, capital resources, trends, uncertainties, views of key business risks, and future expectations