Ch 1 - A Framework for Financial Accounting

Question 0

Describe investors.

Answer 0

Investors want to make good decisions related to buying and selling company’s stock (shares of ownership).

Question 1

Describe the two primary functions of financial accounting.

Answer 1

Measure the business activities of the company and communicate those measurements to external parties for decision-making purposes.

Question 2

Describe creditors.

Answer 2

Creditors make decisions related to lending money to the company.

Question 3

Define corporation and limited liability. What about taxes?

Answer 3

A corporation is a company that is legally separate from its owners. The advantage of this legal separation is limited liability for stockholders. Stockholders will not lose any personal assets if the company loses too much or fails.

But, the company is taxed separately from the owners, so the owners pay tax twice. Double taxation.

Question 4

Define sole proprietorship. What about taxes?

Answer 4

A business owned by one person. The business’s income is included in the person’s personal income and thus taxed only once. But, liability is an issue.

Question 5

Define partnership.

Answer 5

A business owned by two or more persons. Liability is a risk.

Question 6

Define operating activities.

Answer 6

Transactions related to the primary operations of the company, i.e. Providing products and services to customers, plus the costs of doing so like utilities, taxes, advertising, salaries, and rent. Calculated first for statement of cash flows.

Selling
Advertising
Utilities
Rent
Taxes
Salaries

Question 7

Define investing activities.

Answer 7

Calculated second for statement of cash flows.
Transactions involving the purchase and sale of resources that provide long-term benefit to the company (eg years).

Equipment
Supplies
Building

Question 8

Define financing activities.

Answer 8

Calculated last for the statement of cash flows.
Transactions the company has with investors and creditors.

Issuing stock
Loan from bank

Question 9

Define assets.

Answer 9

Company’s resources.

Cash
Equipment
Supplies
Building
Inventory
Land
Accounts receivable

Question 10

Define liabilities.

Answer 10

Amounts owed to creditors.

Bank loan
Accounts payable.
Notes payable (has interest)

Question 11

Define stockholders’ equity

Answer 11

Owners’ claims to resources. Stockholders are the owners. They claim any resources not owed to creditors.

Question 12

What is the basic accounting equation?

Answer 12

Assets = Liabilities + Stockholders’ Equity

Also:
Assets - Liabilities = Stockholders’ Equity

The accounting eq illustrates a fundamental model of business valuation.

Question 13

Define revenues.

Answer 13

Amounts earned from selling products or services to customers.

Question 14

Define expenses.

Answer 14

The costs of providing products and services.

Salaries 
Rent
Supplies
Utilities
Research and Development (R&D)

Question 15

Define net income.

Answer 15

Net Income = Revenues - Expenses
Note: not the same as profit.

Conversely, net loss occurs when expenses exceed revenues.

Question 16

Define dividends.

Answer 16

Cash payments to stockholders. Comes out of net income.

Dividends are not considered to be expenses.

Question 17

What are the four primary financial statements.

Answer 17

1. Income Statement
2. Statement of Stockholders’ Equity
3. Balance Sheet
4. Statement of Cash Flows

Question 18

Describe the statement of stockholders’ equity.

Answer 18

A financial statement that summarizes the changes in stockholders equity over an interval of time.

Stockholders’ equity consists of common stock and retained earnings.

Question 19

Define retained earnings.

Answer 19

Net income - dividends.

It is an internal source of stockholders’ equity.

Question 20

Describe balance sheet

Answer 20

Financial statement that pr dents the financial position of the company on a particularly date.

Assets = Liabilities + Stockholders’ Equity

Question 21

Describe statement of cash flows

Answer 21

Financial statement that measures activities involving cash receipts and cash payments over an interval of time. There are 3 categories: operating, investing, and financing.

Question 22

Define the management discussion and analysis (MD&A) section.

Answer 22

Another source of info in addition the the financial statements. Typically includes management’s views on significant events, trends, and uncertainties pertaining to the company’s operations and resources.

Question 23

Define note disclosures

Answer 23

These offer additional info either to explain the information presented in the financial statements or to provide info not included in the financial statements.

Eg. Report total revenues by geographic region.

Question 24

Know this: No other single piece of company information better explains companies’ stock price performance than does financial accounting net income, the bottom line in the income statement. (p18)

Answer 24

Didnlahsf

Question 25

What is GAAP?

Answer 25

Generally Accepted Accounting Principles

Formal standards for reporting financial info in order to easily compare diff companies and inform decisions about where to lend or invest resources.

Question 26

What is FASB?

Answer 26

Financial Accounting Standards Board

FASB is an independent private-sector body with full-time voting members and a very large support staff. It establishes standards for financial accounting and reporting.

Question 27

What is IASB?

Answer 27

International Accounting Standards Board

Global counterpart to FASB. Developed and promoted IFRS (International Financial Reporting Standards)
Objectives:
1. Develop a single set of high-quality, understandable global accounting standards
2. Promote the use of those standards
3. Bring about the convergence of national accounting standards and international accounting standards around the world

Question 28

What’s the SEC?

Answer 28

Securities and Exchange Commission. Government agency responsible for setting accounting and reporting standards for publicly traded companies. Delegated the responsibility (not the authority) for the private sector to the FASB.

Question 29

What is an auditor?

Answer 29

Auditors are independent external parties that verify a company’s financial statements and ensure they comply with GAAP. Auditors add credibility to a company’s financial statements, thus informing investors’ and creditors’ decisions.

Question 30

Financial accounting should provide information that…

Answer 30

1. Is useful to investors and creditors in making decisions.
2. Helps predict cash flows.
3. Tells about economic resources, claims to resources, and changes in resources and claims.

Question 31

Define ethics.

Answer 31

Ethics refers to a code or moral system that provides criteria for evaluating right and wrong behavior.

Question 32

Describe the conceptual framework for financial accounting.

Answer 32

The FASB establishes financial accounting standards based on a conceptual framework, which is like the “theory” of accounting. Like the Constitution’s role in providing underlying principles for laws, the conceptual framework prescribes the correctness of financial accounting rules.