Accounting Exam 1 Flashcards
What is the purpose of an income statement?
shows how successfully your business performed during a period of time, by subtracting expenses from revenues
What is the purpose of a retained earnings statement?
indicates how much of previous income was distributed to owners of the business to allow for future growth
What is the purpose of a balance sheet?
presents a picture at a point in time of what your business owns (assets) and what it owes (liabilities)
What is the purpose of a statement of cash flows?
shows where the business obtained cash during a period of time and how that cash was used
What does an income statement report?
it reports expenses, revenues, and net income or loss/profit
Does an income statement report during a period of time or at a point in time?
during a period of time
Amounts received by a company for issuing stock are NOT considered what?
it is NOT considered revenue
Dividends paid to owners of a company are NOT considered what?
they are NOT considered expenses
What are retained earnings?
the net income retained in a company
What does a retained earnings statement report?
it shows the amounts and changes in retained earnings over a period of time
How is retained earnings calculated?
the beginning retained earnings is added to net income, deducting dividends
What happens on a retained earnings statement when there is net loss in a company?
the net loss amount is deducted in the retained earnings statement
What do financial statement users evaluate when looking at a statement of retained earnings?
they evaluate dividend payment practices
What does a balance sheet report?
it reports assets and claims to assets at a specific point in time
What two categories are assets subdivided into?
claims of creditors and claims of owners
What is another word for claims of creditors?
liabilities
What is another word for an owner’s claim to assets?
stockholder’s equity
What is the accounting equation?
assets = liabilities + stockholder’s equity
What two things comprise stockholder’s equity?
common stock and retained earnings
What results when a company sells new shares of stock?
common stock
What does a statement of cash flows report?
to provide financial information about cash receipts and cash payments of a business for a period of time, and the amount of cash at the end of the period
What three types of activities are shown in a statement of cash flows?
Operating, financing, and investing activities
How are the four financial statements interconnected?
retained earnings sheet uses the result of the income statement, the result of the retained earnings statement is used in the balance sheet, and the result of the cash flows statement is used in the balance sheet
What is an Auditor?
someone who checks the work of the accountant to make sure the numbers are correct
What is included in an annual report?
the financial statements, auditor’s reports
What does a management discussion and analysis (MD&A) present?
ability to pay near-term obligations, ability to fund operations and expansion, results of operation
What are notes to the financial statements that are included in an annual report?
explanatory notes and supporting schedules
Liquidity
how easily something can be turned into cash
What is a sole proprietorship?
a business with one owner
What is a partnership?
when a business has two or more owners
What is a corporation?
a separate legal entity for which evidence of ownership is provided by shares of stock
What is the expanded accounting equation?
assets = liabilities + common stock + revenue - expenses - dividends
Why are expenses and dividends shown with negatives in expanded accounting equation charts?
because the equation needs to balance visually
What is common stock?
an owners claim to business
What are dividends?
the distribution of cash to stockholders
What does GAAP stand for?
generally accepted accounting principles
How do you calculate net income?
Net income = revenue - expenses
What does it mean if net income is negative?
there is net loss
What does depreciation mean?
equipment being used up
How do you calculate ending retained earnings?
Ending retained earnings = beginning balance + net income - dividends
What are assets?
resources owned by the business, something that can provide future benefits
What are operating activities?
cash from customers, cash to suppliers/employees
What are investing activities?
the purchase/sale of long-term assets
What are financing activities?
the borrowing and paying back of money and selling of stock
What is a bond?
when a company borrows money from people or companies
What is unearned revenue?
revenue that is acquired without providing a good or service
What are the three accounting principles and assumptions?
1) economic entity assumption - the business and owners must be kept separate
2) Monetary unit assumption - we record transactions we can express monetarily
3) Historical cost principles - record assets at their cost (with some exceptions)
What makes information useful?
correctness, relevance, decision making, reliability
