Chapter 1: Financial Statements and Business Decisions

Question 1

Accounting

Answer 1

A system that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers.

Question 2

Content

Answer 2

the categories of items (aka elements) reported on each of the 4 statements

Question 3

Structure

Answer 3

the equation that shows how the elements within the statement are organized and related

Question 4

Use

Answer 4

how the information is used by stockholders and creditors to make investment and lending decisions

Question 5

The 4 Basic Financial Statements

Answer 5

Balance Sheet
Income Statement
Statement of Stockholders’ Equity
Statement of Cash Flows

Question 6

Balance Sheet (Statement of Financial Position)

Answer 6

Reports the amount of assets, liabilities, and stockholders’ equity of an accounting entity at a point in time.

Question 7

4 items identified on statements

Answer 7

Name of the entity
Title of the Statement
Specific Date of the Statement
Unit of Measure

Question 8

Accounting Entity

Answer 8

The organization for which financial data are to be collected

Question 9

Basic Accounting Equation

Answer 9

Assets = Liabilities + Stockholders’ Equity

Question 10

Assets

Answer 10

What the company owns (economic resources)

Question 11

Liabilities

Answer 11

Financing from creditors ( what the company owes to creditors)

Question 12

Stockholders’ Equity

Answer 12

Financing from stockholders (what the company owes to owners)

Question 13

Accounts Payable

Answer 13

Arise from the purchase of goods or services from suppliers on credit without a formal written contract.

Question 14

Notes Payable

Answer 14

Results from cash borrowings based on a formal written debt contract with banks

Question 15

Common Stock

Answer 15

The investment of cash and other assets in the business by stockholders

Question 16

Retained Earnings

Answer 16

Amount of earnings (profit) reinvested in the business (and thus not distributed to stockholders in the form of dividends)

Question 17

Income Statement

Answer 17

Revenue - Expenses = Net Income

Question 18

Revenues normally are

Answer 18

amounts expected to be received for goods/services that have been delivered to a customer, whether or not the customer has paid for the goods/services

Question 19

Retained Earnings Equation

Answer 19

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

Question 20

Statement of Cash Flows

Answer 20

Reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.

Question 21

Cash flows from operating activities

Answer 21

cash flows that are directly related to earning income

Question 22

Cash flows from investing activities

Answer 22

Include cash flows related to the acquisition or sale of the company’s plant/equipment and investments

Question 23

Cash flows from financing activities

Answer 23

Cash flows directly related to the financing of the enterprise itself; involves the receipt or payment of money to investors and creditors (except for suppliers)

Question 24

Primary Objective of Financial Reporting to External Users

Answer 24

To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

Question 25

Fundamental Characteristics of Useful Information

Answer 25

Relevant to Users’ Decisions
Faithful Representation of Company Activities
Timely, Verifiable, Comparable, and Understandable

Question 26

3 Steps to Ensure the Accuracy of Records and Safeguarding of Assests

Answer 26

System of Internal Controls
External Auditors
Board of Directors

Question 27

Generally Accepted Accounting Practices (GAAP)

Answer 27

The measurement and disclosure rules used to develop the information in financial statements.

Question 28

Sole Proprietorship

Answer 28

an unincorporated business owned by one person; usually is small in size and is common in the service, retailing, and farming industries.

Legally, the business and the owner aren’t separate entities but accounting views them as separate.

Question 29

Partnership

Answer 29

An unincorporated business owned by two or more persons knowns as partners.

Legally, a partnership isn’t legally separate from its owners and each partner has unlimited liability. The partnership is a separate business entity to be accounted for separately from its several owners.

Question 30

Corporation

Answer 30

A business incorporated under the laws of a particular state. Owners are called stockholders/shareholders; they have limited liability

Question 31

4 Advantages of the Corporate Form

Answer 31

Limited Liability for Stockholders
Continuity of Life
Ease in Transferring Ownership (Stock)
Opportunities to Raise Large Amounts of $ by Selling Shares to a Large Number of People