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Financial Accounting > Chapter 1: Accounting and the Financial Statements > Flashcards

Chapter 1: Accounting and the Financial Statements Flashcards

1
Q

a company’s annual report

A

Form 10-K

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2
Q

a set of standardized reports in which the detailed transactions of a company’s activities are reported and summarized so they can be communicated to decision-makers

A

financial statements

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3
Q

the process of identifying, measuring, recording, and communicating financial information about a company’s activities so decision-makers can make informed decisions

A

accounting

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4
Q

Accounting is the language of _________

A

business

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5
Q

Demand for accounting information coming from OUTSIDE the business is what TYPE of accounting?

A

financial accounting

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6
Q

Who are the “users” of accounting information in FINANCIAL accounting?

A
  1. Investors (owners)
  2. Creditors (lenders)
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7
Q

Demand for accounting information coming from INSIDE the business is what TYPE of accounting?

A

managerial accounting

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8
Q

Who are the “users” of accounting information in MANAGERIAL accounting?

A

managers

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9
Q

What do investors (owners) use accounting information for?

A

To evaluate the future prospects of a company and decide where to invest their money.

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10
Q

What do creditors (lenders) use accounting information for?

A

To evaluate whether to loan money to a company.

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11
Q

Who are three other external users of accounting information?

A
  1. Governmental Agencies
  2. Labor Unions
  3. Financial Analysts
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12
Q

What are the four basic financial statements?

A
  1. The Balance Sheet
  2. The Income Statement
  3. The Retained Earnings Statement
  4. The Statement of Cash Flows
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13
Q

a business that has an identity separate from that of its owners and managers and for which accounting records are kept

A

accounting entity

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14
Q

What are the THREE forms of business organization?

A
  1. Sole Proprietorship
  2. Partnership
  3. Corporation
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15
Q

Sole proprietorships account for ____% of all businesses.

A

70%

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16
Q

What type of business organization does the following describe?
- Usually small, local businesses
- easily formed, tax advantages, and owner has control over the business
- The owner is personably responsible for the debt of its business
- Can be formed or dissolved at the wishes of the owner, limited life

A

Sole Proprietorship

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17
Q

What type of business organization does the following describe?
- small businesses and mainly professional practices (lawyers, physicians, accountants)
- provide increased access to financial resources and the individual skills of each person
- _______ entity doesn’t pay taxes; each person pays taxes at his or her individual rate
- both people are jointly responsible for all the debt of the business

A

partnership

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18
Q

a company chartered by the state to conduct business as an “artificial person” and owned by one or more stockholders (ex: Apple)

A

corporation

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19
Q

T or F: The stockholder’s legal responsibility for the debt of a corporation is limited to the amount they invested in the business.

A

True

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20
Q

Shares of stock can be easily transferred from one owner to another through ______ markets without affecting the corporation that originally issued the stock.

A

capital

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21
Q

What are 3 advantages of a CORPORATION business organization?

A
  1. Ability to raise capital by selling new shares of stock
  2. The limited liability of owners (stockholders)
  3. The transferability of shares
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22
Q

What are 2 disadvantages of a CORPORATION business organization?

A
  1. Requirements to form are more complex
  2. Owners generally pay more taxes
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23
Q

What are the 2 reasons that owners of a corporation generally pay more taxes?

A
  1. The corporate income tax is greater than the individual income tax rate.
  2. A corporation’s income is taxed twice (at the corporate level and at the individual level) (called double taxation)
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24
Q

Majority of business in the U.S. is conducted by __________.

A

corporations

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25
Q

What are the three business activities?

A
  1. Financing Activities
  2. Investing Activities
  3. Operating Activities
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26
Q

Which business activity does this describe?
- obtaining funds to start a business (from owners or creditors)

A

financing activities

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27
Q

Which business activity does this describe?
- buying resources (assets) used to generate revenues

A

investing activities

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28
Q

Which business activity does this describe?
- operating the business to earn a profit

A

operating activities

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29
Q

T or F: When borrowing money (getting a loan) from another entity such as a bank, the business MUST repay the amount borrowed.

A

True

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30
Q

the person to whom money is owed (ex: bank)

A

creditor

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31
Q

obligation to repay a creditor; can take many forms

A

liability

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32
Q

a corporation borrowing money with the promise to repay the amount borrowed PLUS INTEREST at a future date

A

notes payable

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33
Q

special form of note payable used by corporations to obtain large amounts of money

A

bond payable

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34
Q

the dollar amount paid to a corporation for the shares of stock and represents the basic ownership interest in a corporation

A

common stock

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35
Q

T or F: corporations DO NOT have to repay stockholders the amount invested

A

True

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36
Q

distributions of a portion of a corporations earnings to stockholders on a regular basis

A

dividends

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37
Q

economic resources representing expected future economic benefits controlled by the business (ex: cash, accounts receivable, inventory, land, buildings, equipment, and intangible assets)

A

assets

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38
Q

T or F: In the case of financial difficulty or distress, the claims of the creditors (liabilities) must be paid prior to the claims of the stockholders (stockholders’ equity)

A

True

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39
Q

the owner’s (investors) claims against the assets of a corporation after all liabilities have been deducted; claims of the stockholders.

A

stockholder’s equity

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40
Q

the purchase and sale of assets used in operations (commonly referred to as property, plant, and equipment) are a corporation’s _____ activities.

A

investing

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41
Q

the increase in assets that results from the sale of products or services

A

revenue

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42
Q

the cost of assets used up in the creation of liabilities during the operation of a business

A

expenses

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43
Q

amounts owed to employees for work performed

A

wages payable

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44
Q

If revenues > expenses =

A

net income

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45
Q

If expenses > revenues =

A

net loss

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46
Q

a financial statement that reports the resources (assets) owned by a company and the claims against those resources (liabilities and stockholder’s equity) at a specific point in time

A

The Balance Sheet

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47
Q

a financial statement that reports the profitability (revenues, expenses, and income) of a business over a specific period of time; reporting how well a company’s operations has performed over a period of time

A

The Income Statement

48
Q

a financial statement that reports how much of the company’s income was retained in the business and how much was distributed to owners for a period of time

A

The Retained Earnings Statement

49
Q

a financial statement that provides relevant information about a company’s cash receipts (inflows of cash) and cash payments (outflows of cash) during an accounting period; expressing the sources and uses of a company’s cash over a period of time

A

Statement of Cash Flows

50
Q

Most companies prepare financial statements at the end of each ____, ______, and ________.

A

month, quarter, and year

51
Q

the rules and conventions used to prepare financial statements that help decision-makers to compare performance over time and across companies

A

Generally Accepted Accounting Principles (GAAP)

52
Q

the federal agency established by Congress to regulate securities markets and ensure effective public disclosure of accounting information.

A

Securities and Exchange Commission (SEC)

53
Q

The Securities and Exchange Commission (SEC) has the power to set accounting rules for _______ ______ companies.

A

publicly traded

54
Q

the primary accounting standard-setter in the US which has been granted the power to set standards by the SEC.

A

Financial Accounting Standards Board (FASB)

55
Q

an independent, privately funded accounting standard-setting body with the goal of developing a single-set of high-quality accounting standards that result in transparent and comparable information reported in general purpose financial statements

A

International Accounting Standards Board (IASB)

56
Q

a general term that describes an international set of generally accepted accounting standards

A

International Financial Reporting Standards (IFRs)

57
Q

What is the fundamental accounting equation?

A

Assets = Liabilities + Stockholder’s Equity

58
Q

T or F: In the fundamental accounting equation, assets must ALWAYS BE EQUAL TO liabilities + stockholder’s equity

A

True

59
Q

an accounting period that runs for one year

A

fiscal year

60
Q

cash and other assets that are reasonably expected to be converted into cash within one year or one operating cycle, whichever is longer; listed in order of liquidity

A

current assets

61
Q

the average time that it takes for a company to purchase goods, resell them, and collect the cash from customers

A

operating cycle

62
Q

Companies typically designate ___ year(s) as the dividing line between current and noncurrent assets

A

one

63
Q

What are 5 common types of CURRENT assets?

A
  1. Cash
  2. Marketable Securities
  3. Accounts Receivable
  4. Inventories
  5. Prepaid expenses (advance payment for rent, insurance, and other services)
64
Q

short-term investments in the debt and stock of other companies as well as government securities

A

marketable securities

65
Q

the right to collect an amount due from customers

A

accounts receivable

66
Q

What are 3 common types of NONCURRENT assets?

A
  1. Long-term investments
  2. Property, plant, and equipment
  3. Intangible Assets
67
Q

investments that the company expects to hold on to for longer than one year (this includes land or buildings that a company is not currently using in operations, as well as debt and equity securities)

A

long-term investments

68
Q

the tangible, long-lived, productive assets used by a company in its operations to produce revenue (includes land, buildings, machinery, manufacturing equipment, office equipment, and furniture)

A

property, plant, and equipment

69
Q

companies allocating a portion of an (property, plant, or equipment) asset’s cost as an expense in each period in which the asset is used

A

depreciation

70
Q

the total amount of depreciation that the company has expenses over the life of its assets

A

accumulated depreciation

71
Q

the difference between the cost and the accumulated depreciation is the asset’s:

A

book value (or carrying value)

72
Q

What are 4 examples of intangible assets?

A
  1. Copyrights
  2. Patents
  3. Trademarks
  4. Goodwill
73
Q

obligations that will be satisfied, through the payment of cash or provision of goods or services, within one year or the operating cycle, whichever is longer.

A

current liabilities

74
Q

What are 5 types of current liabilities?

A
  1. Accounts Payable
  2. Salaries Payable
  3. Unearned Revenue
  4. Interest Payable
  5. Income Taxes Payable
75
Q

an obligation to repay a vendor or supplier for merchandise supplied to the company

A

accounts payable

76
Q

an obligation to pay an employee for services performed

A

salaries payable

77
Q

an obligation to deliver goods or perform a service for which a company has already been paid

A

unearned revenue

78
Q

an obligation to pay interest on money that a company has borrowed

A

interest payable

79
Q

an obligation to pay taxes on a company’s income (taxes owed to the government)

A

income taxes payable

80
Q

the obligations of the company that will require payment beyond one year or the operating cycle, whichever is longer

A

long-term liabilities

81
Q

What are two examples of long-term liabilities

A
  1. Notes payable
  2. Bonds payable
82
Q

Stockholder’s Equity arises primarily from what two sources?

A
  1. Contributed Capital
  2. Retained Earnings
83
Q

composed of the owner’s (investors) contributions of cash and other assets to the company and includes common stock

A

contributed capital

84
Q

the accumulated net income of a company that has not been distributed to owners in the form of dividends

A

retained earnings

85
Q

Together, a company’s liabilities and equity make up the ______ of a business.

A

capital

86
Q

a company’s ability to pay obligations as they become due

A

liquidity

87
Q

What are two useful measures of liquidity?

A
  1. Working Capital
  2. Current Ratio
88
Q

Working Capital is a measure of liquidity computed as:

A

Current Assets - Current Liabilities

89
Q

Why is the Income Statement useful to investors?

A

It provides them with information about a company’s ability to earn future income

90
Q

the income statement consists of two major items:

A
  1. revenues and gains
  2. expenses and losses
91
Q

what type of revenue arises from the principal activity of the business?

A

sales revenue

92
Q

increase in net assets that occur from peripheral or incidental transactions (revenues from sources other than the sale of products or services)

A

gains

93
Q

decreases in net assets that occur from peripheral or incidental transactions (expenses that are not associated with revenues)

A

losses

94
Q

What is the equation for Net Income?

A

Net Income = Total Revenues - Total Expenses

95
Q

What are the three important subtotals of a multi-step income statement?

A
  1. Gross Margin
  2. Income from Operations
  3. Net Income
96
Q

measures the initial profit made from selling a product, but not total profit because other operating expenses have not yet been subtracted

A

gross margin

97
Q

What is the equation for Gross Margin?

A

Gross Margin= Net Sales - Cost of Goods Sold

98
Q

What is the equation for Income from Operations?

A

Income from Operations = Gross Margin - Operating Expenses

99
Q

the expenses the business incurs in selling goods or providing services and managing the company

A

operating expenses

100
Q

revenues and expenses from activities other than the company’s principal operations

A

nonoperating activities

101
Q

For many companies, the most important non-operating item is ______ and ________ income.

A

Interest and investment income

102
Q

What is the equation for income before taxes?

A

Income Before Taxes= Income from Operations - Nonoperating Items

103
Q

What is the equation for Net Income in a multi-step income statement?

A

Net Income= Income Before Taxes - Income Taxes Expense

104
Q

a useful measure of a company’s ability to generate profit (sometimes called return on sales)

A

Net Profit Margin

105
Q

What is the equation for Net Profit Margin?

A

Net Profit Margin= Net Income / Sales (or Service) Revenue

106
Q

the income earned by the company but not paid out in the form of dividends

A

retained earnings

107
Q

What are the three steps of a retained earnings statement?

A
  1. List the retained earnings balance at the beginning of the period obtained from the balance sheet.
  2. Add net income from the income statement.
  3. Subtract any dividends declared during the period (should equal retained earnings at the end of the period as reported on the balance sheet)
108
Q

Cash flows are divided into three categories:

A
  1. Cash flows from operating activities
  2. Cash flows from investing activities
  3. Cash flows from financing activities
109
Q

any cash flows directly related to earning income. this includes cash sales and collections of accounts receivable as well as cash payments for goods, services, salaries and interest

A

cash flows from operating activities

110
Q

any cash flow related to acquisition or sale of investments and long-term assets such as property, plant, and equipment

A

cash flows from investing activities

111
Q

any cash flow related to obtaining capital of the company. this includes the issuance and repayment of debt, common stock transactions, and the payment of dividends

A

cash flows from financing activities

112
Q

What do creditors use the statement of cash flows for?

A

To assess the creditworthiness of a company

113
Q

individuals or entities that the corporation owes money to are called

A

creditors

114
Q

obligations to repay creditors

A

liabilities

115
Q

the long-term survival of a company depends on its ability to produce

A

net income

116
Q

A company with healthy cash flow—particularly if it comes from operating activities—is in a
good position to repay debts as they come due, pay dividends, and is a ________ borrower.

A

low-risk

Financial Accounting (10 decks)

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