Chapter 2

Question 1

CBS (Classified Balance Sheet)

Answer 1

Groups together similar assets and similar liabilities using a number of standard classifications and sections

Question 2

Accounting equation

Answer 2

Assets= liabilities + stockholders equity

Question 3

Current assets

Answer 3

Assets that a company expects to convert to cash or use up within one year of its operating cycle whichever is longer

Question 4

Operating cycle

Answer 4

The average time required to go from cash to cash in producing revenue

Question 5

Longterm investments

Answer 5

Generally 1) investments in stocks and bonds of other corps that are held for more than one year 2) long term assets such as land or buildings that a company is not currently using in its operating activities 3) long term notes receivable

Question 6

Depreciation

Answer 6

The allocation of the cost of an asset to a number of years

Question 7

Intangible assets

Answer 7

Assets with no physical substance and yet are often very valuable

Question 8

Current liabilities

Answer 8

Obligations that the company is to pay within the next year or operating cycle whichever is longer

Question 9

Profitability ratios

Answer 9

Measure the operating success of a company for a given period of time

Question 10

Earnings per share

Answer 10

Measures the net income earned on each share of common stock

Question 11

Liquidity

Answer 11

A company’s ability to pay obligations expectws to become due within the next year or operating cycle

Question 12

Working capital

Answer 12

Current assets- current liabilities

Question 13

Liquidity ratios

Answer 13

Measure the short teem ability of the company to pay its maturing obligations and to meet unexpected needs for cash

Question 14

Current ratio

Answer 14

Current assets/ current liabilities

Question 15

Solvency

Answer 15

A company’s ability to pay interest as it comes due and to repay the balance of a debt due at its maturity

Question 16

Solvency ratios

Answer 16

Measure the ability of the company to survive over a long period of time

Question 17

Debt to assets ratio

Answer 17

Total liabilities/ total assets

Measures the percent of total financing by creditors

Question 18

Free cash flow

Answer 18

The net cash provides by operating activities after adjusting for capital expenditures

Question 19

Free cash flow

Answer 19

Net cash provided by op activities- capital expenditures-cash dividends

Question 20

Generally Accepted Accounting Principles

Answer 20

GAAP set of US accounting principles and standards that have authoritative support

Question 21

Securities and Exchange Commission

Answer 21

The agency of the US gov that oversees US financial markets and accounting standard setting bodies

Question 22

Financial accounting standards board

Answer 22

FASB the primary accounting standard setting body in the US

Question 23

International accounting standards board

Answer 23

IASB issues standards called international financial reporting standards-adopted by many countries outside the US

Question 24

Public company accounting oversight board

Answer 24

PCAOB determines auditing standards and reviews the performance of auditing firms-result of Sarbanes-Oxley Act

Question 25

Comparability

Answer 25

When dif companies use the same accounting principles

Question 26

Consistency

Answer 26

A company uses the same accounting principles and methods from year to year

Question 27

Verifiable

Answer 27

Independent observers using the same methods obtain similar results

Question 28

Monetary unit assumption

Answer 28

Requires that only those things that can be expressed in money are included in the accounting records

Question 29

Economic entity assumption

Answer 29

States that every economic entity can be separately identified and accounted for

Question 30

Periodicity assumption

Answer 30

Notice that the income statement, retained earnings statement, and statement of all cover periods of one year and the balance sheet is prepared at the end of each year

Question 31

Going concern assumption

Answer 31

States that the business will remain in operation fir the foreseeable future

Question 32

Historical cost principal

Answer 32

Dictates that companies record assets at their cost

Question 33

Fair value principle

Answer 33

Indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)

Question 34

Full disclosure principle

Answer 34

Requires that companies disclose all circumstances and events that would make a difference to financial statement users

Question 35

Constraint

Answer 35

Considered when deciding whether companies should be required to provide a certain type of info

Question 36

Accounting info system

Answer 36

The system of collecting and processing transaction data and communicating financial info to decision makers

Question 37

Accounting transactions

Answer 37

Economic events that require recording in the financial statements

Question 38

Summary of transactions

Answer 38

Each transaction is analyzed in terms of its effect on, assets, and stockholders equity
The two sides of the equation must always be equal
The cause of each change in stockholders equity must be indicated

Question 39

Account

Answer 39

An individual accounting record of increases or decreases in a specific asset, liability, stockholders equity, revenue, or expense item

Question 40

Double entry system

Answer 40

The 2-sided effect of each transaction is recorded in appropriate accounts

Question 41

fundamental qualities of useful info

Answer 41

1) relevance (accurate expectations of future)

2) faithful representation (nothing important has been omitted)

Question 42

enhancing qualities of useful info

Answer 42

comparability
consistency
verifiability
timeliness
understandability