BURNLEY 1e: Chapter 1 Review

Question 1

Accounting equation

Answer 1

The equation that provides structure to the financial statements, in which assets = liabilities + shareholders’ equity.

Question 2

Annual report

Answer 2

An annual document prepared and published by a corporation in which it reports on its business activities during the year. The report includes the corporation’s annual financial statements.

Question 3

Assets

Answer 3

Elements of the statement of financial position that have probable future benefits that can be measured, are owned or controlled by a company, and are the result of a past transaction.

Question 4

Auditor

Answer 4

A professionally trained accountant who examines a company’s accounting records and financial statements and provides an opinion regarding whether they fairly present the company’s financial position and operating results in accordance with accounting standards.

Question 5

Board of directors

Answer 5

The governing body of a company elected by the shareholders to represent their ownership interests.

Question 6

Canada Revenue Agency (CRA)

Answer 6

The federal government program providing retirement benefits to retired workers based on the premiums they and their employers paid into the plan when they were working.

Question 7

Capital appreciation

Answer 7

The gain or increase in value in a company’s share price.

Question 8

Classified statement of financial position

Answer 8

A statement of financial position in which the assets and liabilities are listed in liquidity order and are categorized into current (or short-term) and non-current (or long-term) sections.

Question 9

Common shares

Answer 9

Certificates that represent portions of ownership in a corporation. These shares usually carry a right to vote.

Question 10

Comparative information

Answer 10

Financial information showing the results of both the current period and preceding period.

Question 11

Consolidated financial statement

Answer 11

Financial statements that represent the combined financial results of a parent company and its subsidiaries.

Question 12

Creditors

Answer 12

Individuals or entities that are owed something by a company.

Question 13

Current

Answer 13

An asset or a liability that will be received, realized, or consumed, or else settled or paid within 12 months from year end.

Question 14

Current assets

Answer 14

An asset that will be turned into cash or consumed in the next year or operating cycle of a company.

Question 15

Current liabilities

Answer 15

A liability that will require the use of cash or the rendering of a service, or will be replaced by another current liability, within the next year or operating cycle of the company.

Question 16

Dividends

Answer 16

Payments made to shareholders that represent a portion of a company’s net income that is being distributed to shareholders. Dividends are paid only after they are declared by the board of directors.

Question 17

Earnings

Answer 17

Synonym for net income, net earnings, and profit.

Question 18

Earnings management

Answer 18

The practice of choosing revenue and expense methods so that earnings are increased or decreased in particular accounting periods, or smoothed over time.

Question 19

Earnings per share

Answer 19

A ratio calculated by dividing the earnings for the period by the average number of shares outstanding during the period.

Question 20

Equity

Answer 20

The net assets of a company (its assets less its liabilities), representing the interest of shareholders in the company. It is the sum of a company’s share capital and retained earnings. It is also sometimes used to refer simply to the shareholders’ equity section of the statement of financial position.

Question 21

Expenses

Answer 21

The decrease in economic benefit that results from resources that flow out of the company in the course of it generating its revenues.

Question 22

Financial accounting

Answer 22

The study of the accounting concepts and principles that are used to prepare financial statements for external users.

Question 23

Financial statements

Answer 23

Reports prepared by the management of a company for its shareholders, creditors, and others summarizing how the company performed during a particular period. Includes the statement of financial position, the statement of income, the statement of changes in equity, the statement of cash flows, and the notes to the financial statements.

Question 24

Financial statement users

Answer 24

Decision makers who utilize a company’s financial statements, which include the owners (shareholders) and those who have lent money to the organization.

Question 25

Financing activities

Answer 25

A company’s activities that involve raising funds to support the other activities of the company or represent a return of these funds. The two major ways to raise funds are to issue new shares or borrow money. Funds can be returned via debt repayment, dividend payments, or the repurchase of shares.

Question 26

Fiscal year

Answer 26

The one-year period that represents a company’s operating year.

Question 27

Gains

Answer 27

Increases in income resulting from the sale of investments; property, plant, and equipment; or intangible assets at amounts in excess of their carrying amounts.

Question 28

Gross profit

Answer 28

Synonym for gross margin.

Question 29

Income

Answer 29

The inflow of resources that increase shareholders’ equity but are not the result of shareholder activities. Income includes revenues and gains.

Question 30

Interest

Answer 30

An expense incurred on money borrowed from creditors that is incurred with the passage of time.

Question 31

International Financial Reporting Standards (IFRS)

Answer 31

The accounting standards that must be followed by Canadian public companies and that private companies may elect to adopt.

Question 32

Investing activities

Answer 32

Company activities involving long-term investments. Primarily investments in property, plant, and equipment, and in the shares of other companies.

Question 33

Investors

Answer 33

Individuals or entities that acquire shares of a company as an investment.

Question 34

Liabilities

Answer 34

An element of the statement of financial position that leads to a probable future sacrifice of a company’s resources.

Question 35

Liquidity

Answer 35

An organization’s short-term ability to convert its assets into cash to be able to meet its obligations and pay its liabilities.

Question 36

Losses

Answer 36

A decrease in income resulting from the sale of investments; property, plant, and equipment; or intangible assets at amounts less than their carrying amounts.

Question 37

Management

Answer 37

The individuals responsible for running (managing) a company.

Question 38

Management discussion and analysis (MD&A)

Answer 38

Section of a company’s annual report where management provides their perspective and analysis of the financial statements. The information is meant to complement or supplement the financial statements and be forward-looking.

Question 39

Managerial accounting

Answer 39

The study of the preparation and uses of accounting information by a company’s management.

Question 40

Market value

Answer 40

The amount that an item would generate if it were sold in a transaction between independent parties.

Question 41

Net assets

Answer 41

Assets minus liabilities. Net assets are equal to shareholders’ equity. Also known as shareholders’ equity.

Question 42

Net earnings

Answer 42

A company’s total revenues less its total expenses, plus gains, less losses. Synonym for earnings, net earnings, and profit.

Question 43

Net income

Answer 43

A company’s total revenues less its total expenses, plus gains, less losses. Synonym for earnings, net earnings, and profit.

Question 44

Net loss

Answer 44

What results when expenses for a period exceed the income earned.

Question 45

Non-current

Answer 45

An asset or liability presented in financial statements that will not be received, realized, consumed, or settled or paid within 12 months from the fiscal year end.

Question 46

Notes to the financial statements

Answer 46

Section of a company’s financial statements where management provides more details about specific items, such as significant accounting policies, the types of inventory and assets held, and so on.

Question 47

Operating activities

Answer 47

The activities of a company that are related to selling goods and services to customers, and other basic day-to-day activities related to operating the business.

Question 48

Parent company

Answer 48

A company that owns and controls other companies, known as subsidiaries.

Question 49

Principal

Answer 49

The initial amount lent or borrowed.

Question 50

Private company

Answer 50

Company whose shares do not trade on a public stock exchange.

Question 51

Profit

Answer 51

Synonym for earnings, net earnings, or net income.

Question 52

Public company

Answer 52

Company whose shares trade on a public stock exchange.

Question 53

Retained earnings

Answer 53

Earnings that are kept within a company and reinvested, rather than being paid out to shareholders in the form of dividends.

Question 54

Revenues

Answer 54

Inflows of resources to a company that result from the sale of goods and/or services.

Question 55

Share capital

Answer 55

The shares issued by a company to its owners. Shares represent the ownership interest in the company.

Question 56

Shareholders

Answer 56

The individuals or entities that own shares in a company.

Question 57

Shareholders’ equity

Answer 57

The shareholders’ claim on total assets, represented by the investment of the shareholders (share capital) and undistributed earnings (retained earnings) generated by the company.

Question 58

Statement of cash flows

Answer 58

Financial statement that summarizes the cash flows of a company during the accounting period, categorized into operating, investing, and financing activities.

Question 59

Statement of changes in equity

Answer 59

Financial statement that measures the changes in the equity of a company over a period of time, differentiating between changes that result from transactions with shareholders and those resulting from the company’s operations. Also known as the statement of changes in shareholders’ equity, statement of shareholders’ equity, and statement of equity.

Question 60

Statement of financial position

Answer 60

Financial statement that indicates the resources controlled by a company (assets) and the claims on those resources (by creditors and investors) at a given point in time. Also known as the balance sheet.

Question 61

Statement of income

Answer 61

Financial statement showing a company’s revenues and expenses, indicating the operating performance over a period of time. Also known as the income statement, the statement of operations, statement of earnings, and statement of profit or loss.

Question 62

Subsidiary companies

Answer 62

A company that is owned and controlled by a parent company.

Question 63

Working capital

Answer 63

The liquid funds available for use in a company, calculated as current assets minus current liabilities.