CFA 23: Financial Reporting Mechanisms

Question 1

assets

Accounts and Financial Statements

Answer 1

Assets are the economic resources of a company.

Question 2

liabilities

Accounts and Financial Statements

Answer 2

Liabilities are the creditors’ claims on the resources of a company.

Question 3

owners’ equity

Accounts and Financial Statements

Answer 3

Owners’ equity is the residual claim on assets.

Question 4

revenues

Accounts and Financial Statements

Answer 4

Revenues are inflows of economic resources to the company.

Question 5

expenses

Accounts and Financial Statements

Answer 5

Expenses are outflows of economic resources or increases in liabilities.

Question 6

accounts

Accounts and Financial Statements

Answer 6

Accounts are individual records of increases and decreases in a specific asset, liability, component of owners’ equity, revenue, or expense. For financial statements, amounts recorded in every individual account are summarized and grouped appropriately within a financial statement element.

Question 7

chart of accounts

Accounts and Financial Statements

Answer 7

Chart of accounts are the actual accounts used in a company’s accounting system.

Question 8

allowance for bad debts

Accounts and Financial Statements

Answer 8

Allowance for bad debts is an account for the estimated uncollectible amount. Because the effect of the allowance for bad debts account is to reduce the balance of the company’s accounts receivable, it is known as a “contra account”.

Question 9

contra account

Accounts and Financial Statements

Answer 9

A contra account is any account taht is offset or deducted from another account.

Question 10

accumulated depreciation

Accounts and Financial Statements

Answer 10

Accumulated depreciation is an offset to property, plant, and equipment (PPE) reflecting the amount of the cost of PPE that has been allocated to current and previous accounting periods.

Question 11

sales returns and allowances

Accounts and Financial Statements

Answer 11

Sales returns and allowances are an offset to revenue reflecting any cash refunds, credits on account, and discounts from sales prices given to customers who purchased defective or unsatisfactory items.

Question 12

noncurrent assets

Accounts and Financial Statements

Answer 12

Noncurrent assets are assets that are expected to benefit the company over an extended period of time (usually more than one year).

Question 13

current assets

Accounts and Financial Statements

Answer 13

Current assets are those that are expected to be consumed or converted into cash in the near future, typically one year or less.

Question 14

inventory

Accounts and Financial Statements

Answer 14

Inventory is the unsold units of product on hand.

Question 15

accounts receivable

Accounts and Financial Statements

Answer 15

Accounts receivable are amounts customers owe the company for products that have been sold as well as amounts that may be due from suppliers (such as for returns of merchandise). Also called commercial receivables or trade receivables.

Question 16

other receivables

Accounts and Financial Statements

Answer 16

Other receivables represent amounts owed to the company from parties other than customers.

Question 17

cash

Accounts and Financial Statements

Answer 17

Cash refers to “cash on hand” (e.g. petty cash and cash not yet deposited into the bank) and in the bank.

Question 18

cash equivalents

Accounts and Financial Statements

Answer 18

Cash equivalents are very liquid short-term investments, usually maturing in 90 days or less.

Question 19

balance sheet

Accounts and Financial Statements

Answer 19

The balance sheet represents a company’s financial position at a particular point in time. It provides a listing of a company’s assets and the claims on those assets (liabilities and equity claims). The equation that underlies the balance sheet is also known as teh “basic accounting equation”. Acompany’s financial position is reflected using the following equation:
Assets = Liabilities + Owner’s equity

Question 20

residual claim

Accounts and Financial Statements

Answer 20

Owners’ equity is the residual claim of the owners (i.e. the owners’ remaining claim on the company’s assets after the liabilities are deducted). The concept of the owners’ residual claim is well illustrated by the slightly rearranged balance sheet equation, roughly equivalent to the structure commonly seen in the balance sheets of UK companies:
Assets - Liabilities = Owners’ equity

Question 21

statement of retained earnings

Accounts and Financial Statements

Answer 21

Statement of retained earnings is a financial statement that reconciles beginning-of-period and end-of-period balance sheet values of retained income; shows the linkage between the balance sheet and income statement.

Question 22

double-entry accounting

Accounts and Financial Statements

Answer 22

Double-entry accounting is the accounting system of recording transactions in which every recorded transaction affects at least two accounts so as to keep teh basic accounting equation (assets = liabilities + owners’ equity) in balance.

Question 23

unclassified balance sheet

Accounts and Financial Statements

Answer 23

An unclassified balances sheet is one that does not show subtotals for current assets and current liabilities. Assets are simply lsited in order of liquidity (how quickly they are expected to be converted into cash).

Question 24

unearned revenue

Accounts and Financial Statements

Answer 24

Unearned revenue arises when a company receives cash prior to earning the revenue

Question 25

direct format

The Accounting Process

Answer 25

Direct format refers to the operating cash section of statement of cash flows appearing simply as operating cash receipts less operating cash disbursements.

Question 26

indirect format

The Accounting Process

Answer 26

The indirect format is an alternative format for the operating cash section, which begins with net income and shows adjustments to derive operating cash flow.

Question 27

accrued revenue (unbilled revenue)
The Accounting Process

Answer 27

Accrued revenue arises when a company earns revenue prior to receiving cash but has not yet rognized the revenue at the end of an accounting period.

Question 28

prepaid expense

The Accounting Process

Answer 28

Prepaid expense arises when a ompany makes a cash payment prior to recognizing an expense. The accounting treatment involves an originating entry to record the payment of cash and the prepaid asset reflecting future benefits, and a subsequent adusting entry to record the expense and eliminate the prepaid asset. In other words, prepaid expenses are assets that will be subsequently expensed.

Question 29

accrued expenses

The Accounting Process

Answer 29

Accrued expenses arise when a company incurs expenses that have not yet been paid as of the end of an accounting period. Accrued expenses result in liabilities that usually require future cash payments.