Chapter 2: Financial Statements and Accounting Concepts/Principles

Question 1

what is a financial statement?

Answer 1

communicate economic information about the entity to individuals who make decisions and informed judgements

Question 2

describe the accounting process

Answer 2

transactions summarize accounts on financial statements

Question 3

describe the accounting principles + auditing standards and their financial statements

Answer 3

1. Financial position at the end of the period - Balance Sheet
2. Earnings for the period - Income Statement
3. Cash flows during the period - State of Cash Flows
4. Investments by and distributions to owners (Stockholders) - Statement of Changes in Stockholder’s Equity

Question 4

what are transactions?

Answer 4

economic interchanges between the entity and other organizations and individuals

Question 5

describe bookeeping

Answer 5

procedures for sorting, classifying, and presenting

Question 6

describe accounting

Answer 6

selection of alternative methods of reflecting the effects of certain transactions

Question 7

where are transactions summarized

Answer 7

accounts

Question 8

what is a balance sheet?

Answer 8

listing of the organization’s assets, liabilities, and stockholder’s equity at a point in time and shows amounts that are not adjusted for changes in the purchasing power of the dollar

Question 9

what is the accounting equation?

Answer 9

Assets = Liabilities + Stockholder’s Equity

Question 10

what are assests?

Answer 10

probable future economic benefits

Question 11

what are liabilities?

Answer 11

probable future sacrifices of economic benefit

Question 12

what are net assessts

Answer 12

assests - liabilities = stockholder’s equity

Question 13

what is a cash account

Answer 13

represents the cash on hand and in the banks (should be readily available as cash)

Question 14

describe accounts receivable

Answer 14

amounts owed (due) from customers who have purchased something on credit and has a greed to pay within a specified period of time

Question 14

describe merchandise

Answer 14

the cost to the firm of merchandise that has been acquired but not yet sold

Question 15

describe accumulated depreciation

Answer 15

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

Question 16

describe depreciation

Answer 16

the process of spreading the cost of an asset over its useful life to the entity

Question 17

describe accounts payable

Answer 17

amounts owed to suppliers of merchandise inventory that was purchased on credit and will be paid within a specific period of time

Question 18

describe accrued liabilities

Answer 18

amounts owed to various credits including any wages owed to employees for services provided to the firm through the balance sheet date

Question 19

what is short-term debt

Answer 19

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

Question 20

what is long-term debt

Answer 20

amounts borrowed that will not be repaid within one year from the balance sheet date

Question 21

what are current assets

Answer 21

cash and other assets that are likely to be converted into cash or used to benefit the entity within one year1

Question 22

what are current liabilities

Answer 22

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

Question 23

what is the purpose of the income statement

Answer 23

to answer whether or not the firm made a profit within the considered period of time; net income or net loss

Report revenues from operation
subtract expenses incurred in general operation

Question 24

what are net sales

Answer 24

revenue

Question 25

what are costs of goods sold

Answer 25

total cost of merchandise removed from inventory and delivered to customers as a result of sales

Question 26

what is gross profit

Answer 26

difference between net sales and costs of goods sold and represents the seller’s maximum amount of cushion from which all other expenses of operating must be met before it’s possible to have net income

Question 27

what are earnings per share of common stock outstanding?

Answer 27

significant for evaluating the market value of a share of common stock

Question 28

transactions that affect the income statement also affect the…

Answer 28

balance sheet

Question 29

describe the statement of changes in stock equity

Answer 29

shows the details of stockholder’s equity and explains changes that occur in components of SE during the year; net income and dividends for the period

Question 30

what are the components of stockholder’s equity?

Answer 30

paid-in capital and retained earnings

Question 31

what is paid-in capital

Answer 31

total amount invested in the entity by the stockholders

Question 32

What are retained earnings

Answer 32

cumulative net income of the entity that has not been distributed to stockholders as dividends

Question 33

what are dividends

Answer 33

distributions of earnings that have been able to the stockholders (reduce retained earnings)

Question 34

describe accumulated deficit

Answer 34

retained earnings has a negative balance and

Question 35

what is the purpose of the statement of cash flows?

Answer 35

identify the sources and uses of cash during the year (a period of time)

Question 36

describe cash flows from financing activities

Answer 36

amounts raided from the
sale of long-term debt, common stock, and dividend paid on common stock

Question 36

describe cash flows from investing activities

Answer 36

purchase of long-lasting equipment

Question 37

equation for ending retained earnings , derive net income

Answer 37

beginning retained earnings + net income - dividend = ending retained earnings; net income = dividends+ending retained earning - beginning retained earnings

Question 38

statement of financial position is synonymous with…

Answer 38

a balance sheet

Question 39

The balance sheet shows the following accounts and amounts:

Cash $13,000; Short-term Debt $21,000; Buildings and Equipment $420,000; Inventory, $44,000; Notes Payable $60,000; Accumulated Depreciation $110,000; Common Stock $80,000; Accounts Receivable $38,000; Retained Earnings $237,000; Accounts Payable $17,000.

Total assets on the balance sheet are:

Answer 39

cash + buildings & equipment + inventory - accumulated depreciation + accounts receivable

$405,000

Question 40

At the beginning of the fiscal year, the balance sheet showed assets of $2,728 and stockholders’ equity of $1,672. During the year, assets increased $148 and liabilities decreased $76.

Liabilities at the end of the year totaled:

Answer 40

assets - stockholder’s equity = sum
sum - decrease in liabilities

Question 41

stockholder’s equity refers to…

Answer 41

the ownership rights of the stockholders of the company

Question 42

matching revenues and expenses refers

Answer 42

accurately reflecting the results of operations for a fiscal period

Question 43

the going concern concept refers to a presumption that

Answer 43

the entity will continue to operate in the foreseeable future

Question 44

the principle of consistency means that

Answer 44

the effect of any change in an accounting method will be disclosed in the financial statements or notes thereto

Question 45

what transactions are to be recorded in the accounting records?

Answer 45

• investment of cash by the owners
• sale of products to consumers
• receipt of services from a “quick-print” shop in exchange for providing advertising design services of equivalent value

Question 46

The balance sheet shows the following accounts and amounts:

Cash $26,000; Short-term Debt $42,000; Buildings and Equipment $840,000; Inventory, $88,000; Notes Payable $120,000; Accumulated Depreciation $220,000; Common Stock $160,000; Accounts Receivable $76,000; Retained Earnings $474,000; Accounts Payable $34,000.

Total assets on the balance sheet are:

Answer 46

cash + building & inventory + inventory - accumulated depreciation + accounts receivable

= $810,000

Question 47

what do consolidated financial statements report and for whom?

Answer 47

Financial position, results of operations, and cash flows for a parent corporation and its subsidiaries

Question 48

the principle of full disclosure means that the reporting company must fully disclose:

Answer 48

all necessary information to prevent a reasonably knowledgeable user of financial statement to be misled

Question 49

The balance sheet shows the following accounts and amounts:

Inventory, $42,000; Long-term Debt 62,500; Common Stock $30,000; Accounts Payable $22,000; Cash $66,000; Buildings and Equipment $195,000; Short-term Debt $24,000; Accounts Receivable $54,500; Retained Earnings $102,000; Notes Payable (nine month) $27,000; Accumulated Depreciation $90,000.

Total current liabilities on the balance sheet are:

Answer 49

accounts payable + short term debt + notes payable
= $73,000

Question 50

What goes in an income statement?

Answer 50

Income tax expense, sales, cost of goods sold, rent expense, service revenue

Question 51

What goes in a balance sheet?

Answer 51

Accumulated depreciation, notes payable, land, common stock, equipment, accounts receivable, supplies, buildings, cash

Question 52

Assets examples

Answer 52

Land, Merchandise inventory, equipment, accounts receivable, supplies, cash, buildings

Question 53

Non-asset examples

Answer 53

Common stock, cost of goods sold, interest expense, long-term debt, sales, accounts payable, retained earnings

Question 54

How to Calculate Retained Earnings

Answer 54

Beginning balance + Net Income - Dividends= Ending Balance

Question 55

Is cash an asset or revenue?

Answer 55

Asset

Question 56

Is a short term investments an asset or liability?

Answer 56

Asset

Question 57

Where does a short-term investment go? Income statement or balance sheet?

Answer 57

Balance sheet

Question 58

Is the depreciation expense an asset or expense?

Answer 58

Expense

Question 59

Net assets is a synonym for

Answer 59

Ending Retained Earnings