Chapter 1

Question 1

Liquidity

Answer 1

The Company’s ability to meet short-term obligations.

Question 2

Solvency

Answer 2

The Company’s ability to meet long-term obligations.

Question 3

Balance Sheet

Answer 3

Presents a company’s current financial position by disclosing the resources the company controls (assets) and its obligations to lenders and other creditors (liabilities) at a specific point in time.

Question 4

Owner’s Equity

Answer 4

Represents the excess of assets over liabilities. Owner’s equity is the owners’ or shareholders’ residual interest in the company’s assets after deducting its liabilities.

Question 5

Relationship between 3 sections of the balance sheet

Answer 5

Assets= Liabilities + Owners’ equity
or
Owners’ equity= Assets - Liabilities
Also called accounting equation or balance sheet equation.

Question 6

Statement of Changes in Equity

Answer 6

Reports changes in the owners’ investment in the business over time.

1. Paid-in Capital
2. Retained Earnings

Question 7

Retained Earnings

Answer 7

The cumulative amount of the company’s profits that have been retained in the company.

Question 8

Paid-in Capital

Answer 8

The amount of capital “paid in” by investors during common or preferred stock issuance, including the par value of the shares themselves. Paid in capital represents the funds raised by the business from equity, and not from ongoing operations.

Question 9

Financial Flexibility

Answer 9

The ability of the company to react and adapt to financial adversities and opportunities

Question 10

Cash flows from operating activities

Answer 10

Cash flows from day-to-day operations of the company.

Question 11

Cash flows from investing activities

Answer 11

Cash flows from activities associated with the acquisition and disposal of long-term assets, such as property and equipment.

Question 12

Cash flows from financing activities

Answer 12

Cash flows from activities related to obtaining or repaying capital to be used in the business.

Question 13

Amortization

Answer 13

1. The paying off of debt in regular installments over a period of time.
2. The deduction of capital expenses over a specific period of time (usually over the asset’s life).

While amortization and depreciation are often used interchangeably, technically this is an incorrect practice because amortization refers to intangible assets and depreciation refers to tangible assets.

Question 14

Consolidated basis

Answer 14

Consolidated financial statements include the company and all its subsidiaries.

Question 15

Operating Activities

Answer 15

Activities that are a part of the day-to-day business functioning of an entity.

Question 16

Investing Activities

Answer 16

Activities associated with the acquisition and disposal of long-term assets.

Question 17

Financing Activities

Answer 17

Activities related to obtaining or repaying capital

Question 18

Assets

Answer 18

Economic resources of a company

Question 19

Liabilities

Answer 19

Creditors’ claims on the resources of a company

Question 20

Owners Equity

Answer 20

Residual claim on the economic resources of a company minus liabilities owed to creditors.

Question 21

Revenue

Answer 21

Inflows of economic resourced to the company

Question 22

Expenses

Answer 22

Outflows of economic resources or increases in liabilities

Question 23

Allowance for bad debts

Answer 23

An estimate of the amount that will not be collected from accounts receivable.

Question 24

Contra Account

Answer 24

Any account that is offset or deducted from another account.

An account on a corporation or entity’s financial statements that offsets the balance of a related and corresponding account. A contra account is found on financial statements as an offsetting account to represent the financial flip-side of a figure/asset/liability for book-keeping purposes. Contra accounts typically represent the offsetting nature of debits and credits on a company’s financials.

Question 25

Unclassified Balance Sheet

Answer 25

A balance sheet that does not show subtotals for current assets and current liabilities.