Accounting Equation Components

Question 1

Purpose Of Financial Statements Is To…

Answer 1

Help Understand how a business is performing

Question 2

Accounting Equation

Answer 2

Assets = Liabilities + Owners Equity

Question 3

What is an Asset?

Answer 3

Resources owned/controlled by a business that will produce economic benefits in the future

Question 4

Examples Of Assets?

Answer 4

Cash, Inventory, Equipment

Question 5

Cash can be used for…

Answer 5

investing in projects, maintain equipment

Question 6

Inventory can be sold for…

Answer 6

cash

Question 7

Equipment can be used to make…

Answer 7

products that customers will purchase and will benefit the company in the future

Question 8

Liabilities plus owner’s equity

Answer 8

shows how a business obtained its assets or resources

Question 9

Businesses acquire assets by

Answer 9

1) Raising money via a loan from bank/lending institutions 2) On credit from its suppliers, creating accounts payable

Question 10

Example of Liabilities

Answer 10

1) Loans from banks

2) Accounts payable to suppliers

Question 11

Liabilities represent

Answer 11

claims on assets of the company by 3rd parties who are not owners of the business

Question 12

Owner’s Equity

Answer 12

1) Capital contributed by its owners (Equity investment)

2) Profit’s earned by the business

Question 13

Owner’s Equity vs Liabilities

Answer 13

1) Owners have a say in how business is run. Lendors and suppliers cannot decide how the business operates
2) Business is obligated to pay back lenders, payments to owners are discretionary
3) Owners don’t expect to be paid back but expect to make money through dividends
4) If the business fails owners may not receive anything but lenders have to be repaid. Liabilities are not discretionary.
5) What doesn’t belong to outsiders in form of liabilities belongs to owners in the form of owners equity

Question 14

What are Dividends?

Answer 14

A portion of the company’s profits that are distributed to the shareholders

Question 15

As per the accounting equation, assets of the business belong to

Answer 15

Creditors (Liabilities) or Owners (Equity)

Question 16

What are the 3 major financial statements?

Answer 16

1. Balance Sheet
2. Income Statement
3. Statement Of Cash Flows

Question 17

What is a Balance sheet?

Answer 17

1. An expanded representation of Accounting Equation
   Assets = Liabilities + Owner’s Equity
2. Balance Sheet shows the financial status of a company at a certain point in time
3. Snapshot of the company’s resources ( assets) and how they were financed (Liabilities, Owner’s equity)
4. A balance sheet is an excellent source of info for investors to determine how a company is doing

Question 18

Example Of Assets

Answer 18

Cash, Inventory, account’s receivable, buildings, furniture, equipment, pre-paid expenses, content library, pre-paid content

Question 19

Example Of Liabilities

Answer 19

Loans payable, long-term debt, wages payable, accounts payable, salaries payable, gift certificates, notes payable, accrued expenses

Question 20

Examples of Owner’s Equity

Answer 20

contributed capital, paid-in capital, retained earnings, common stock, preferred stock