1ST QUARTER FLASHCARDS

Question 1

STATEMENT OF FINANCIAL POSITION

Answer 1

A statement of financial position formerly called a balance sheet is a structured statement that shows the assets, liabilities and equity of a business entity. It is a snapshot of the company’s financial condition at a specific moment in time usually during the month end or year end.

Question 2

ASSETS

Answer 2

These are the economic resources you control that have resulted from past events and can provide you with economic benefits.

Question 3

4 Criteria of a Current Asset

Answer 3

• It is expected to be realized in or is intended for sale or consumed in the entity’s normal operating cycle.
• It is held primarily for the purpose of being traded.
• It is expected to be realized within twelve months after the date of the statement of financial position.
• It is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the date of the statement of financial position.

Question 4

Current Asset accounts

Answer 4

Cash, Accounts Receivable, Prepaid Expense, Raw Materials, Inventory, Short-Term Investment

Question 5

Non-current Assets

Answer 5

Assets that do not meet any of the criteria required for current assets. In other words, all other assets that are not current shall be classified as noncurrent assets. It includes assets that are long-term in nature like fixed assets, long-term investments, and intangibles.

Question 6

Fixed assets

Answer 6

it includes the Property, Plant, and Equipment (PPE) such as Land, Building, Furniture and Fixtures, equipment, vehicle, etc. These are acquired for use in operations and have an estimated useful life of more than one year.

Question 7

Long-term investments

Answer 7

are assets held by an entity intended to accumulate wealth or resources by means of capital distribution in the form of royalties, interest, dividends, rentals, capital appreciation, or other benefits obtained through trading relationships with the intention of holding the investments for more than one year.

Question 8

Intangibles

Answer 8

are assets without physical substance like goodwill, patents, copyrights, licenses, franchises, trademarks, and brand names.

Question 9

LIABILITIES

Answer 9

It is something a person or company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services.

Question 10

4 Criteria of Current Liabilities

Answer 10

• It is expected to be settled in the entity’s normal operating cycle.
• It is held primarily for the purpose of being traded.
• It is due to be settled within twelve months after the balance sheet date.
• The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date.

Question 11

Accounts Payable

Answer 11

include debts arising from the purchase of an asset or acquisition of services of an account.

Question 12

Notes Payable

Answer 12

include debts arising from the purchase of an asset or acquisition of services on account evidenced by a promissory note.

Question 13

Unearned Revenues

Answer 13

represent obligations of the business arising from advance payments received before goods or services are provided to the customer.

Question 14

Accrued Liabilities

Answer 14

include amounts owed to others for expenses already incurred but not yet paid. Examples of these are salaries payable, utilities payable, taxes payable, and interest payable.

Question 15

Non-current Liabilities

Answer 15

are long-term liabilities or obligations which are payable for a period longer than one year. All other liabilities that are not current shall be classified as noncurrent liabilities.

Question 16

Mortgage Payable

Answer 16

the long-term debt of a business with security or collateral in the form of real properties.

Question 17

Bonds Payable

Answer 17

a certificate of indebtedness under the seal of a corporation, specifying the terms of repayment and the rate of interest to be charged.

Question 18

EQUITY

Answer 18

It is the residual interest in the assets of the entity after deducting all its liabilities.

Question 19

But in the preparation of the Statement of Financial Position, it is presented as:

Answer 19

1. Account Form – it follows the accounting equation where assets are listed on the left-hand column of the report with the liabilities and owner’s equity listed in the right-hand columns.
2. Report Form – it shows in one straight column the assets, followed by liabilities and owner’s equity.

Question 20

STATEMENT OF COMPREHENSIVE INCOME

Answer 20

(formerly known as the income statement) is a structured financial statement that shows the financial performance of a business entity for a given period. It shows the profit/loss earned by the business for the period. A period covered by an income statement may be monthly, quarterly, semi-annually, or annually.

Question 21

Revenue/Income

Answer 21

refers to increases in economic benefits during the accounting period in the form of enhancement of assets or decreases of liabilities that result in increases in equity, other than those relating to investments by the business owners.

Question 22

Expenses

Answer 22

are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or increases of liabilities that result in decreases in equity, other than those relating to distributions to the business owners.

Question 23

Net Income/Loss

Answer 23

is the result of the operation. If the income is greater than the expenses, then the result is net income while if the expenses are greater than income, then the result is a net loss.

Question 24

TEMPORARY ACCOUNTS

Answer 24

Also known as nominal accounts are the accounts found under the SCI. They are called such because at the end of the accounting period, balances under these accounts are transferred to the capital account, thus having only temporary amounts and resulting to zero beginning balances at the beginning of the following year.

Question 25

It presents expenses according to nature. The expenses are not allocated among the various functions within the entity. This type of income statement is used in a service business.

Answer 25

Nature of Expense Method

Question 26

Otherwise known as the cost of sales method, it presents expenses according to function. This type of income statement is used in a merchandising business.

Answer 26

Function of Expense Method

Question 27

THE SINGLE-STEP APPROACH

Answer 27

presented using the nature of expense method.

Question 28

THE MULTI-STEP APPROACH

Answer 28

presented using the function of expense method.

Question 29

STATEMENT OF CHANGES IN OWNER’S EQUITY

Answer 29

It shows the changes in the capital or Owner’s Equity as a result of additional investment or withdrawals by the owner; plus or minus the net income or net loss for the year. The framework defines equity as the residual interest in the assets of the entity after deducting all its liabilities..

Question 30

Why is there a need to create a Statement of Owner’s Equity?

Answer 30

• To learn how transactions and some other factors affect the capital invested in the business
• To assess if the capital invested had increased or decreased for the period.
• To show the link of the statement of income with the statement of Financial Position.

Question 31

Capital

Answer 31

It is an account bearing the name of the owner representing the original and additional investment of the owner of the business increased by the amount of net income earned. It is decreased by the cash or other assets withdrawn by the owner as well as the net loss incurred during the year.

Question 32

Drawings

Answer 32

It represents the withdrawals made by the owner of the business either in cash or other assets.

Question 33

Income Summary

Answer 33

It is a temporary account used at the end of the accounting period to close income and expense accounts. The balance of this account shows the net income or net loss for the period before it is closed to the capital account.

Question 34

Additional investment or contribution to the business by the owner

Answer 34

INCREASE

Question 35

Withdrawals or drawings from the business by the owner.

Answer 35

DECREASE

Question 36

Earning of profit by the business

Answer 36

INCREASE

Question 37

Incurrence of loss by the business

Answer 37

DECREASE

Question 38

STATEMENT OF CASH FLOW

Answer 38

It summarizes the cash receipts (cash inflows) and cash payments (cash outflows) for the accounting period. It summarizes the cash activities of the business by classifying cash inflows and cash outflows into operating, investing and financing activities.

Question 39

Why is there a need to create a Statement of Cash Flows?

Answer 39

• To know the sources and uses of Cash
• To portray how company has spent its cash.

Question 40

Receipts of Cash in Operating Activities

Answer 40

✓ Collections from customers for the performance of services or sale of goods
✓ Royalties, fees, commissions received
✓ Interest, dividends and other income received

Question 41

Payments of Cash in Operating Activities

Answer 41

✓ To suppliers for services and goods acquired
✓ Employees’ salaries
✓ Government licenses and taxes
✓ Interest expense
✓ Other operating expenses

Question 42

Receipts of Cash in Investing Activities

Answer 42

✓ Cash proceeds from selling productive assets like property, plant, and equipment
✓ Cash proceeds from selling investments in equity securities of other companies

Question 43

Payments of Cash in Investing Activities

Answer 43

✓ Payments for the purchase of productive assets like property, plant, and equipment
✓ Payments to acquire investments in equity securities

Question 44

Payments of Cash in Financing Activities

Answer 44

✓ Cash withdrawal of owner
✓ Payment for the principal balance of loan

Question 45

Receipts of Cash in Financing Activities

Answer 45

✓ Original and additional investment by the owner
✓ Proceeds of loan

Question 46

It lists all of the major operating cash receipts and payments during the period by source.

Answer 46

DIRECT METHOD