Chapter 2 - A Further Look at Financial Statements

Question 1

A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections.

Answer 1

Classified balance sheet

Question 2

Ability to compare the accounting information of different companies because they use the same accounting principles.

Answer 2

Comparability

Question 3

Use of the same accounting principles and methods from year to year within a company.

Answer 3

Consistency

Question 4

Constraint that weights the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.

Answer 4

Cost constraint

Question 5

Assets that companies expect to convert to cash or use up within one year or the operating cycle, whichever is longer.

Answer 5

Current assets

Question 6

Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.

Answer 6

Current liabilities

Question 7

A measure of liquidity computed as current assets divided by current liabilities.

Answer 7

Current ratio

Question 8

A measure of solvency calculated as total liabilities divided by total assets. It measures the percentage of total financing provided by creditors.

Answer 8

Debt to assets ratio

Question 9

A measure of the net income earned on each share of common stock, computed as net income minus preferred dividends divided by the weighted-average number of common shares outstanding during the year.

Answer 9

Earnings per share (EPS)

Question 10

An assumption that every economic entity can be separately identified and accounted for.

Answer 10

Economic entity assumption

Question 11

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

Answer 11

Fair value principle

Question 12

Information that is complete, neutral, and free from error.

Answer 12

Faithful representation

Question 13

The primary accounting standard-setting body in the United States.

Answer 13

Financial Accounting Stands Board (FASB)

Question 14

Net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid.

Answer 14

Free cash flow

Question 15

Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

Answer 15

Full disclosure principle

Question 16

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

Answer 16

Generally accepted accounting principles (GAAP)

Question 17

The assumption that the company will continue in operation for the foreseeable future.

Answer 17

Going concern assumption

Question 18

An accounting principle that states that companies should record assets at their cost.

Answer 18

Historical cost principle

Question 19

Assets that do not have physical substance.

Answer 19

Intangible assets

Question 20

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

Answer 20

International Accounting Standards Board (IASB)

Question 21

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

Answer 21

International Financial Reporting Standards (IFRS)

Question 22

The ability of a company to pay obligations that are expected to be come due within the next year or operating cycle.

Answer 22

Liquidity

Question 23

Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Answer 23

Liquidity ratios

Question 24

Generally, (1) investments in stocks and bonds of other corporations that companies hold for more than one year; (2) long-term assets, such as land and buildings, not currently being used in the company’s operations; and (3) long-term notes receivable.

Answer 24

Long-term investments

Question 25

Obligations that a company expects to pay after one year.

Answer 25

Long-term liabilities (long-term debt)

Question 26

Whether an item is large enough to likely influence the decision of an investor or creditor.

Answer 26

Materiality

Question 27

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

Answer 27

Monetary unit assumption

Question 28

The average time required to purchase inventory, sell it on account, and then collect cash from customers - that is, go from cash to cash.

Answer 28

Operating cycle

Question 29

An assumption that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business.

Answer 29

Periodicity assumption

Question 30

Measures of the operating success of a company for a given period of time.

Answer 30

Profitability ratios

Question 31

Assets with relatively long useful lives that are currently used in operating the business.

Answer 31

Property, plant, and equipment

Question 32

The group charged with determining auditing standards and reviewing the performance of auditing firms.

Answer 32

Public Company Accounting Oversight Board (PCAOB)

Question 33

An expression of the mathematical relationship between one quantity and another.

Answer 33

Ratio

Question 34

A techniques that expresses the relationship among selected terms of financial statement data.

Answer 34

Ratio analysis

Question 35

The quality of information that indicates the information makes a difference in a decision.

Answer 35

Relevance

Question 36

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

Answer 36

Securities and Exchange Commission (SEC)

Question 37

The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.

Answer 37

Solvency

Question 38

Measures of the ability of the company to survive over a long period of time.

Answer 38

Solvency ratios

Question 39

Information that is available to decision-makers before it loses its capacity to influence decisions.

Answer 39

Timely

Question 40

Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.

Answer 40

Understandability

Question 41

The quality of information that occurs when independent observers, using the same methods, obtain similar results.

Answer 41

Verifiable

Question 42

The difference between the amounts of current assets and current liabilities.

Answer 42

Working capital