AFM 191 - Chp. 1.2 - intro to financial statements

Question 1

What’s the preparation order of financial statements

Answer 1

1. income statement (profit + loss)
2. statement of retained earnings
3. balance sheet (financial position statement)
4. cash flow statement

Question 2

What’s the purpose, period and basic equation of the income statement

Answer 2

prepared for specific period: month, quarter, year

purpose: to understand a company’s profit/loss for a period

basic equation: total revenue - total expenses = net income

Question 3

What’s the period, purpose and basic equation of the statement of retained eranings

Answer 3

period: prepared for a specific period; month, quarter, or year

purpose: to understand the change in retained earnings for a period

basic equation: beginning retained earnings + net income - current period dividends = ending retained earnings

Question 4

What’s the period, purpose, and basic equation of the balance sheet

Answer 4

period: balances at a specific point in time

purpose: to understand the financial position at a particular point in time

basic equation: assets = liabilities + shareholder’s equity

Question 5

what’s the period, purpose and basic equation of the cash flow statement

Answer 5

Prepared for a specific period: month, quarter, or year

purpose: to understand sources and use of cash during a period

basic equation: operating cash flows + investing cash flows + financing cash flows = net increase (or decrease) in cash for a period + cash balance beginning of the period = cash balance at the end of the period

Question 6

Which stakeholders are income statements useful to?

Answer 6

external + internal to understand a company’s profit or loss for a particular period

Question 7

Define income statement

Answer 7

financial statement prepared to understand a company’s profit or loss for a period.

Question 8

provide examples of revenue accounts and define them

Answer 8

1. service revenue - revenue from selling services to customers
2. sales revenue - revenue from selling goods to customers
3. interest revenue - revenue from lending on credit
4. rent revenue - revenues from rent

Question 9

Define the statement of retained earnings

Answer 9

financial statement prepared to understand a company’s change in retained earnings for a period.

Question 10

what’s the purpose of the statement of retained earnings

Answer 10

provides financial statement user with the change in retained earnings

Question 11

what does it mean when the current period net income is greater than the current period dividends paid to shareholders in the context of the statement of retained earnings

Answer 11

the ending retained earnings will eb high than the beginning retained earnings.

Question 12

How to prepare for a statement of retained earnings

Answer 12

company obtains the beginning retained earnings balance (amount of earning left over from prior period after prior period dividends were paid out to the shareholders) and then net income is added to the beginning retained earnings and the current period dividends are deducted to obtain ending retained earnings.

Question 13

What connects the balance sheet and statement of retained earnings?

Answer 13

the ending retained earnings is part of the shareholders equity account in the balance sheet

Question 14

Define a balance sheet

Answer 14

financial statement prepared to understand a company’s financial position at a particular point in time.

allows the use to know the ending balances at a point in time.

Question 15

what’s the importance of the balance sheet to an external stakeholders

Answer 15

analyze a balance sheet to understand if a company has a strong financial position before it makes a decision to lend money.

Question 16

Define an asset in context of accounting and basic

Answer 16

an economic resources controlled by the entity resulting from past transaction and from which future economic benefits may be obtained.

what the company owns

Question 17

provide examples of asset accounts

Answer 17

cash + cash equivalents
accounts receivables
inventory, prepaid expenses, property, plant, equipment

Question 18

Define liabilities in accounting and basic context

Answer 18

what the company owes

an obligation of the entity arising rom past transactions, the settlement of which is expected to result in an outflow of economic benefits from the entity.

Question 19

provide examples of liabilities

Answer 19

accounts payable, accrued expenses, long-term debt, bonds payable

Question 20

define shareholders equity in accounting and basic context

Answer 20

the different between what the company owns and owes

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

Question 21

Define a cash flow statement

Answer 21

financial statement prepared to understand the changes in cash flows for a period.

Question 22

what’s the use of cash flow statement for internal stakeholders

Answer 22

to understand when additional cash is needed and take the necessary action to ensure the company does not run out of cash

Question 23

what’s the use of the cash flow statement for external stakeholders

Answer 23

analyze cash flows to determine a company’s ability to pay them dividends and to assess whether a company is effectively investing its cash for future growth potential

Question 24

what can companies use cash flows from operating activities for?

Answer 24

investing into long-term assets (new equipment)

Question 25

what happens when companies don’t have sufficient operating cash flows

Answer 25

they need to sources additional cash from banks or investors

Question 26

How does cash flow statement and balance sheet relate to each other?

Answer 26

ending cash is an asset in the balance sheet.

Question 27

Define operating activites

Answer 27

business activities which result in changes to operating cash flows related to operating the core business

Question 28

define investing activities

Answer 28

business activities which result in changes to investing cash flows related to purchasing or disposing long-term assets during a period

Question 29

define financing activities

Answer 29

business activities which result in changes to financing cash flows related to raising capital