Ch 2

Question 0

What does the balance sheet tell?

Answer 0

What obligations will be due in the near future

And what assets will satisfy them

Question 1

Main objective of financial reporting?

Answer 1

Provide useful info to those making financial decisions

Question 2

What does the income statement tell?

Answer 2

Revenues and expenses for thine period

Question 3

What does the statement of cash flows tell?

Answer 3

Where cash came from and how it

Was used for the period

Question 4

What’s the importance of notes of financial statements?

Answer 4

Provide essential details on company’s accounting policies

And key factors affecting financial condition and performance

Question 5

Decision makers that use financial reporting?

Answer 5

Investors, creditors, insiders, government agencies

Question 6

Understandability

Answer 6

Quality of accounting info that makes it comprehensible

For those willing to spend the necessary time

Question 7

Relevance

Answer 7

Capacity of info to make a difference in a decision

Question 8

Predictive value

Answer 8

Ex. If a company with good earnings has just been named in a lawsuit, are they worth lending to?

Question 9

Confirming value

Answer 9

When something definite happens

Ex. You invest in a company because they will increase their exposure to Asian markets, you then learn the company has acquired a Chinese subsidiary, making your investment good

Question 10

Faithful representation

Answer 10

Quality of info that makes it complete, neutral and free from error

Question 11

Comparability

Answer 11

For accounting info, the quality that allows
a user To analyze 2 or more companies and
look for similarities and differences

Question 12

Depreciation

Answer 12

Process of allocating cost of long term tangible

Asset over its useful life

Question 13

Consistency

Answer 13

For accounting info, the quality that allows
A user to compare two or more accounting
Periods for a single company

Question 14

Materiality

Answer 14

Magnitude of accounting info omission
Or misstatement that will affect judgement
Of someone relying on the info

Question 15

Conservatism

Answer 15

The practice of using the least optimistic estimate
When two estimates of amounts are equally likely

Used for uncertainty on how to account for item or transaction

Question 16

Classified balance sheet

Answer 16

Separates assets into current and non current

Question 17

Operating cycle,( determining the operating cycle is a key skill to understanding any business)

Answer 17

Period of time between the purchase of inventory

And the collection of any receivable from sale of inventory

Question 18

Current asset

Answer 18

Asset that is expected to be realized in cash or sold

Or consumed during the operating cycle or within one year if cycle shorter than one year

Question 19

Non current assets

Answer 19

Long term assets, property, plant, equipment

Question 20

Intangible assets

Answer 20

Provide benefits for the long term,
They lack physical substance
Ex. Trademarks, copyrights, franchise rights, patents and goodwill

Question 21

Current liability

Answer 21

Obligation that will be satisfied in the next operating cycle or one year if operating cycles shorter

Question 22

Long term liability

Answer 22

Liability that won’t be satisfied within a year

Question 23

Stockholders equity

Answer 23

Contributed capital and earned capital, retained earnings

Question 24

Liquidity.

Answer 24

Ability of company to pay its debts as they come due

Question 25

Working capital

Answer 25

Working capital = current assets - current liabilities

May signal inability to pay creditors on a timely basis
Or the company isn’t investing its funds productively as it has too many resources

Question 26

Current ratio

Answer 26

Current ration = current assets/current liabilities

Allows for comparison of liquidity of different companies of different sizes over time

The higher the ratio, the more liquid the company
2:1 is a good rule of thumb

Question 27

2 measures of liquidity

Answer 27

Working capital, current ratio

Question 28

Single step income statement

Answer 28

Income statement in which all expenses are added together and subtracted from revenues

Question 29

Multi step income statement

Answer 29

Income statement that shows classifications of revenues
And expense, as well as important subtotals

Sales, cost of goods sold, gross profit, operating expenses, income form operations, other revenues and expenses, net income

Question 30

Gross profit

Answer 30

Gross profit = sales - cost of goods sold

Question 31

4 important subtotals on multi step income statement

Answer 31

Gross profit
Income from operations
Income before taxes
Income tax expense

Question 32

Profit margin

Answer 32

Profit margin = net income/sales

Good indicator for profitability

Question 33

What does it mean if a profit margin is high?

Answer 33

Means the company is generating revenue while controlling its costs

Question 34

It is important to compare a company’s profit margin with 2 things ?

Answer 34

Prior years and industry norms

Question 35

What link does the statement of retained earnings provide? What does it show?

Answer 35

Link btw income statement and balance sheet

Explains changes in retained earnings during period

Question 36

Statement of cash flows

Answer 36

Summarizes company’s operations, investing and financing activities for the period

Question 37

Operating activities

Answer 37

Concern purchase and sale of product

Question 38

Investment activities

Answer 38

Involve acquisition and sale of long term or non current assets such as long term investments; property, plant, equipment and intangible assets

Question 39

Financing activities

Answer 39

Result for issuance and repayment, or retirement, long term liabilities, capital stock and payment of dividends

Question 40

Auditor’s report AKA Report of independent accountants

Answer 40

Opinion rendered by public accounting firm concerning

The fairness of presentation of financial statements