Chapter 2 Flashcards
What are the four primary financial statements?
Balance sheet (assets and liabilities) Income statement (revenue and expenses) Statement of changes in shareholders equity Statement of cash flows
What is the accounting equation?
Assets-liabilities=shareholders’ equity
Assets = liabilities+ shareholders’ equity
What does the balance sheet reflect?
A company’s shareholders equity for a specific point in time. (assets, liabilities, owners equity)
What is the main purpose of financial statements?
To communicate information about financial status?
What are current assets?
Assets that will generally be used in a year. (Expected to be sold or converted to cash within normal operating cycle)
Provide examples of current assets.
Cash, inventory, accounts receivable, supplies, marketable securities
Assets-liabilities =
Shareholders equity.
Buildings and equipment are reported at?
Original cost with an allowance for depreciation.
Why doesn’t shareholders equity represent net worth of a company?
Many assets are reported at historical cost.
What is calculated on the income statement?
Net income or loss.
What does the income statement reflect?
Profitability over time.
Where, besides the income statement, is net income reported?
Statement of changes in owners’ equity and statement of cash flows.
What is revenue ?
Gross income generated from the sale of products or services.
What does revenue not include!?
Gains from the sale of equipment.
What does gross profit represent?
Net income from the sale of products. Sales - cost of goods sold
What does operating income represent?
Gross profit - general operating expenses
What does net income represent?
Operating income + additional income (including investment income) - other expenses
What does comprehensive income represent?
Net income, plus items not required to be reported on the income statement. (Unrealized gains and losses on securities, gains and losses in foreign translation, changes in minimum pension liability)
Does FASB require reporting of comprehensive income?
Yes
What are the components of shareholders equity?
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock
The total amount invested by the shareholders in the corporation; includes par value and additional amounts contributed by owners.
Paid-in capital
Cumulative profits/losses of a company - dividends paid to shareholders
Retained earnings
Paid-in capital is the total amount invested by shareholders. What are the two components to paid-in capital?
Par value
Additional amount contributed by shareholders
What are retained earnings?
Cumulative profit or losses of a company, reduced by any dividends paid out to shareholders.
How does repurchasing stock (treasury stock) affect a company’s finances?
Cost of the stock is deducted from shareholders equity
Cash is reduced since it was used to pay for the stock.
What does the statement of cash flows accomplish?
Reconciles the beginning and ending cash. It helps determine the ability to meet obligations.
What are the sections of the statement of cash flows?
cash flows from operating activities (begins with net income)
Items not affecting cash flow (depreciation, increase or decrease in payables/receivables)
Cash flows from investing activities
Cash flows from financing activities
What does the statement of cash flows do?
Reconciles the beginning and ending cash of the corporation. It determines ability to meet obligations.
What are the sections of statement of cash flows?
Cash flows from operating activities
Items not affecting cash flow (depreciation, increase or decrease in payables/receivables
Cash flows from investing activities
Cash flows from financing activities
An insurer’s balance sheet is dominated by ____ and ______ investment assets.
Debt / equity
What are assets listed uniquely on insurers’ balance sheets?
Premium receivables
Reinsurance recoverables
Deferred policy acquisition costs