Chapter 1

Question 1

Accounting definition

Answer 1

Accounting is the language that companies use to tell their financial story. More precisely accounting is

• a system of maintaining records of a company’s operations
• communicating that information to decision-makers

Question 2

Financing activities

Answer 2

transactions the company has with investors and creditors

Question 3

Investing activities

Answer 3

transactions involving the purchase and sale of resources that are expected to benefit the company for several years

Question 4

Operating activities

Answer 4

transactions that relate to the primary operations of the company

Question 5

Corporation

Answer 5

a company that is legally separate from its owners.

- the advantage of being legally separate is that the stockholders have limited liabilty

Question 6

sole proprietorship

Answer 6

a business owned by one perosn

Question 7

partnership

Answer 7

a business owned by two or more persons

Question 8

Assets

Answer 8

total resources of the company

assets = liabilities + stockholder’s equity

Question 9

liabilities

Answer 9

amounts owed to the creditors

assets = liabilities + stockholder’s equity

Question 10

stockholders equity

Answer 10

owners claim to resources

assets = liabilities + stockholder’s equity

Question 11

Revenues

Answer 11

are the amounts recognized when the company sells products or provides services to customers

Question 12

Expenses

Answer 12

are the costs of providing products and services and other business activities during the current period.

Question 13

Net income

Answer 13

is the difference between revenues and expenses.

also called earnings or profit.

Question 14

Dividends

Answer 14

are cash payments to stockholders.

• dividends are not expenses.

Question 15

Financial statements

Answer 15

are periodic reports published by the company for the purpose of providing information to external users.

• primary financial statements
  
  • income statement
  • statement of stockholders’ equity
  • balance sheet
  • statement of cash flows

Question 16

Income statement

Answer 16

reports the company’s revenues and expenses over an interval of time

• if revenues > expenses = net income
• if revenues < expenses + net loss

Question 17

statement of stockholders equity

Answer 17

summarizes the changes in stockholders’ equity over an interval of time
stockholders’ = common stock + retained earnings

common stock - represents amounts invested by stockholders (owners) when they purchase shares of stock.
retained earnings - represent all net income minus all dividends over the life of the company. The change in retained earnings equals net income less dividends for the period.

Question 18

balance sheet

Answer 18

presents the financial position of the company on a particular date

Question 19

statement of cash flows

Answer 19

Measures activities involving cash receipts and cash payments over an interval of time

• operating cash flows - cash transactions involving revenue and expense activities during the period
• Investing cash flows - cash transactions for the purchase and sale of investments and long-term assets
• financing cash flows - cash transactions with lenders and stockholders

Question 20

management discussion and analysis (MD&A)

Answer 20

typically includes management’s views on significant events, trends, and uncertainties pertaining to the company’s operations and resources.

Question 21

Note disclosures

Answer 21

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