Chapter 2: Financial Statements

Question 1

transaction

Answer 1

economic interchanges between entities that are accounted for and reflected in financial statements [summarized in accounts]

Question 2

account

Answer 2

record in which transactions affecting individual assets, liabilities, stockholders’ equity, revenues, and expenses are recorded [summarized in financial statements]

Question 3

4 requirements for a financial statement

Answer 3

1. financial position (balance sheet) 2. earnings (income statement) 3. cash flows (statement of cash flows) 4. investments (statement of changes in stockholders’ equity)

Question 4

3 principle forms of business organization

Answer 4

proprietorship, partnership, corporation

Question 5

proprietorship

Answer 5

activity conducted by an individual

Question 6

partnership

Answer 6

a group of proprietors who have banded together (LLP)

Question 7

corporation

Answer 7

formed by having a charter and bylaws and registered by the appropriate office in 1 of the 50 states

Question 8

stockholder

Answer 8

owner of a corporation

Question 9

stock

Answer 9

evidence of ownership in a corporation

Question 10

fiscal year

Answer 10

annual period used for reporting to owners

Question 11

balance sheet

Answer 11

list of assets, liabilities, stockholders’ equity a a point in time (snapshot of financial position)

Question 12

accounting equation (balance sheet equation)

Answer 12

assets = liabilities + stockholders’ equity

Question 13

balance sheet: assets

Answer 13

probable future economic benefits obtained or controlled by a particular entity as a result of past transactions/events (amount of resources controlled/owned by the entity)

Question 14

balance sheet: liabilities

Answer 14

probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future (amount owed to other entities)

Question 15

balance sheet: stockholders’ equity

Answer 15

ownership right of the stockholders of the entity in the assets that remain after liabilities (net assets (assets - liabilities)) (referred to as net worth, net assets, owners’ equity)

Question 16

balance sheet: cash

Answer 16

cash on hand/in bank

Question 17

balance sheet: accounts receivable

Answer 17

amounts due from customers

Question 18

balance sheet: merchandise inventory

Answer 18

cost of merchandise acquired but not yet sold

Question 19

balance sheet: equipment

Answer 19

cost of equipment purchased and used (display cases, racks, shelving, etc. (not the building)

Question 20

balance sheet: accumulated depreciation

Answer 20

portion of the cost of equipment that is estimated to have been used up in the process of operating the business

Question 21

balance sheet: depreciation in accounting

Answer 21

process of spreading the cost of an asset over its useful life to the entity (Not to recognize economic loss in value)

Question 22

balance sheet: other accrued liabilities

Answer 22

amounts owed to various creditors

Question 23

balance sheet: short-term debt

Answer 23

Amounts borrowed that will be repaid within one year of the balance sheet date

Question 24

balance sheet: long-term debt

Answer 24

Amounts borrowed from banks or other creditors that will not be repaid within one year from the balance sheet date

Question 25

balance sheet: accounts receivable

Answer 25

Amounts due to suppliers

Question 26

balance sheet: current assets

Answer 26

cash and other assets likely to be converted into cash or used to benefit the entity within a year

Question 27

balance sheet: current liabilities

Answer 27

liabilities likely to be paid with cash within one year of balance sheet date

Question 28

income statement (profit and loss statement)

Answer 28

The financial statement that summarizes the entity’s revenues, expenses, gains, and losses for a period of time and thereby reports the entity’s results of operations for that period of time. (Did the entity operate at a profit for the fiscal year?); link between balance sheets at the beginning and end of the year

Question 29

income statement: gains

Answer 29

Increases in net assets from incidental transactions that are not revenues or investments by owners

Question 30

income statement: losses

Answer 30

Decreases in net assets from incidental transactions that are not expenses or distributions to owners

Question 31

income statement: net sales/revenue

Answer 31

amount of sales of merchandise to customers less cancelations, returns, etc.

Question 32

income statement: net income

Answer 32

profit for the period (revenue - expenses)

Question 33

income statement: cost of goods sold

Answer 33

cost of merchandise sold

Question 34

income statement: gross profit

Answer 34

net sales - cost of goods (max “cushion”)

Question 35

income statement: income from operations

Answer 35

The difference between gross profit and operating expenses. Also referred to as operating income

Question 36

income statement: selling, general, admin expenses

Answer 36

operating expenses of entity

Question 37

income statement: interest expense

Answer 37

cost of using borrowed funds

Question 38

income statement: income tax

Answer 38

shown after all other items

Question 39

stockholders equity statement

Answer 39

The amount invested in the entity by the stockholders

Question 40

par value

Answer 40

An arbitrary value assigned to a share of stock when the corporation is organized. Sometimes used to refer to the stated value or face amount of a security.

Question 41

retained earnings

Answer 41

Cumulative net income that has not been distributed to the owners/stockholders of a corporation as dividends

Question 42

common stock

Answer 42

number of shares authorized by corporations charter, number issued, number held by stockholders

Question 43

dividends

Answer 43

distributions of earnings that have been made to stockholders reducing retained earnings

Question 44

statement of cash flows purpose

Answer 44

to identify sources and uses of cash during the year

Question 45

cash flow statement: depreciation expense

Answer 45

The expense recognized in a fiscal period for the depreciation of an asset. Added back to net income because it doesn’t require the use of cash

Question 46

cash flow statement: cash flows from investing activities

Answer 46

cash used to purchase long-lived assets

Question 47

comparative statements

Answer 47

financial statements for previous year included as supplementary info in current year

Question 48

income statement: net income —> balance sheet: stockholders’ equity

Answer 48

net income affects retained earnings which is a component of stockholders’ equity

Question 49

3 alternate names for income statement

Answer 49

statement of earnings, P&L statement, statement of operations

Question 50

paid-in capital

Answer 50

total amount invested in the entity by the owners (common stock + additional paid-in capital

Question 51

concepts related to entire model

Answer 51

account equation (A=L+SE), accounting entity (identified and accounted for), going concern (will continue to operate)