Chapter 1: Introduction to Financial Statements

Question 1

Accounting

Answer 1

Preparing and communicating financial information to stakeholders (investors and creditors)

Question 2

Internal Users

Answer 2

Managerial/Management
Finance
Marketing
Human Resources

Question 3

External Users

Answer 3

Financial accounting (getting money from investors and creditors)
Taxing authorities
Present creditors

Question 4

3 Forms of Business Organization

Answer 4

1. Single Proprietorship
2. Partnership
3. Corporation

Question 5

Single proprietorship

Answer 5

One owner
easy to establish
owner controlled
tax advantage
personal liability

Question 6

Partnership

Answer 6

2 or more owners
simple to establish
shared control 
broader skills and resources 
tax advantages
personal liability

Question 7

Corporation

Answer 7

A business organized as a separate legal entity owned by stockholders.
Raises money by issuing shares of stock (common stock = portion of stockholders equity resulting from cash from investors)
easier to transfer ownership
easier to raise funds
no personal liability
reduced liability for investors

Question 8

Accounting equation

Answer 8

Assets (stuff you own) = Liabilities (obligations, what you owe) + Stockholder’s Equity (common stock and retained earnings; revenue, expenses, and dividends)

Question 9

Assets

Answer 9

1) Company controls it
2) Has future economic benefit
(Resources owned by a business)

Question 10

3 Business activities

Answer 10

1. Financing: Borrowing money (debt) or issuing stock
2. Investing: Purchasing resources a company needs to operate, buying assets
3. Operating: Once a business has the assets it needs, it can begin its operations

Question 11

Dividends

Answer 11

Payments to stockholders/shareholders
Stockholders = Anyone with skin in the game
Preffered stock: Jr. Owners
Common stock holders: Have power

Question 12

Creditors

Answer 12

Party to whom amounts are owed

Question 13

Revenue

Answer 13

Amounts earned from sale of products and other sources
Has suffix “revenue”
Increases an asset (usually cash)

Question 14

Liabilities

Answer 14

Accounts owed
Ex: Notes payable, rent payable, accounts payable, unearned revenue (received money for service that has not been done yet)

Question 15

Inventory

Answer 15

Goods available for sale to customers

Question 16

Accounts receivable

Answer 16

Right to receive money from customer as results of a sale
Money you receive
Current Asset

Question 17

Accounts payable

Answer 17

Obligations to suppliers of goods
Money you owe to different suppliers
Liability

Question 18

Expenses

Answer 18

The cost of assets consumed or services used in the process of generating revenues
Spending money to make more money
Dividends are NEVER an expense
Has sufficient expense
Ex: Rent expense

Question 19

Net income/bottom line/earnings

Answer 19

When revenue > expenses

Question 20

Net loss

Answer 20

Expenses > Revenue

Question 21

Income Statement

Answer 21

A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time.
Measures overall performance
Net Income = Revenues - Expenses
Most important
Goes first

Question 22

Retained Earnings Statement

Answer 22

A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period
Retained Earnings = Revenues - Expenses - Dividends
(Net income - dividends)

Question 23

Balance sheet

Answer 23

A financial statement that reports the assets and claims to those assets at a specific point in time.
Assets = Liabilities + Stockholder’s equity
ONE specific date

Question 24

Statement of Cash Flow

Answer 24

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time
Provides information on financing, investing, and operating activities

Question 25

Equity statement

Answer 25

Stockholder’s equity: The owners’ claim to assets

Question 26

Annual Report

Answer 26

A report prepared by corporate management that presents financial information including:

1) financial statements
2) management discussion and analysis section
3) notes
4) auditor’s report

Question 27

Auditor’s report

Answer 27

A report prepared by an independent outside auditor stating the auditor’s opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles (GAAP)

Question 28

Articulation

Answer 28

Connection between statements
Statements are articulated
Everything affects the balance sheet

Question 29

Management discussion and analysis (MD&A)

Answer 29

A section of the annual report that presents management’s views on the company’s ability to pay near‐term obligations, its ability to fund operations and expansion, and its results of operations.

Question 30

Notes (Disclosures)

Answer 30

Notes clarify information presented in the financial statements and provide additional detail
Essential to understanding company’s operating performance and financial position

Question 31

International Financial Reporting Standards (IFRS) 

Answer 31

Accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States

Question 32

Generally accepted accounting principles (GAAP) 

Answer 32

A set of accounting standards that have substantial authoritative support and which guide accounting professionals.

Question 33

Sarbanes‐Oxley Act (SOX)

Answer 33

Regulations passed by Congress to reduce unethical corporate behavior
1) Top management must certify accuracy of information
2) independence of auditors increased
3) Penalties for fraud increased
Taxes did not increase

Question 34

Certified public accountant (CPA) 

Answer 34

An individual who has met certain criteria and is thus allowed to perform audits of corporations

Question 35

Common stock

Answer 35

Term used to describe the total amount paid in by stockholders for the shares they purchase

Question 36

Retained earnings

Answer 36

The amount of net income retained in the corporation

Question 37

Securities and Exchange Commission (SEC)

Answer 37

The agency of the U.S. government that oversees U.S. financial markets and accounting standard‐setting bodies

Question 38

FTC

Answer 38

Federal Trade Commission (prevents monopolies)

Question 39

IRS

Answer 39

International Revenue Service

Question 40

Public Company Accounting Oversight Board (PCAOB) 

Answer 40

The group charged with determining auditing standards and reviewing the performance of auditing firms
Control accounting rules
No more private accounting
Accountable to SEC

Question 41

Financial Accounting Standards Board (FASB)

Answer 41

The primary accounting standard‐setting body in the United States

Question 42

International Accounting Standards Board (IASB)

Answer 42

An accounting standard‐setting body that issues standards adopted by many countries outside of the United States.