Chapter 2 - GAAP Financial Statements

Question 1

A document that quantitatively represents an organization’s financial activities or status

Answer 1

Financial Statement

Question 2

The classification, analysis, and determination of the appropriate method of reporting the effects of the bookkeeping records in an organization’s financial statements

Answer 2

Accounting

Question 3

What are the four primary financial statements?

Answer 3

Balance sheet, income statement, statement of changes in the shareholder’s equity, and statement of cash flows

Question 4

The financial statement that reports the assets, liabilities, and owners’ equity of an organization as of a specific date. Indicates the financial position (strength) of an organization.

Answer 4

Balance Sheet

Question 5

The difference between assets and liabilities in a for-profit business

Answer 5

Shareholder’s equity (a.k.a. Owners’ equity, net worth, or book value)

Question 6

A balance sheet asset classification that includes cash and other assets that are expected to be sold, converted into cash, or exchanged within the business’s normal operating cycle (usually one year)

Answer 6

Current assets

Question 7

The difference between the price paid for an acquired organization and the book value if the acquiring organization pays more than the book value for the acquired organization

Answer 7

Goodwill

Question 8

A balance sheet liability classification that includes obligations whose payments are reasonably expected to require the use of cash or the creation of other current liabilities within one year

Answer 8

Current liabilities

Question 9

The cumulative net income that an organization has retained, after payment of dividends, for reinvestment in the organization’s operations

Answer 9

Retained earnings

Question 10

Provides stakeholders with information regarding the profitability of an organization over a given period of time.

Answer 10

Income statement

Question 11

The inflow of assets, usually cash or accounts receivable, resulting from the sale of products or the rendering of services

Answer 11

Revenue

Question 12

Measured by the assets relinquished or consumed in the process of delivering goods or rendering services to customers

Answer 12

Expenses

Question 13

Sales minus the cost of goods sold on the income statement.

Answer 13

Gross Profit

Question 14

Gross profit expressed as a percentage of gross sales (gross profit divided by gross sales)

Answer 14

Gross Margin (or Gross Profit Margin)

Question 15

An income statement value that reflects income that results from the normal operations of the business during the period covered by the statement; calculated as the gross profit less selling, general, and administrative expenses.

Answer 15

Operating income

Question 16

Revenue minus expenses plus gains minus losses minus taxes

Answer 16

Net Income

Question 17

A measure of income that goes beyond that reported on the income statement by including items such as unrealized gains and losses

Answer 17

Comprehensive income

Question 18

The financial statement that explains any changes that have occurred in the organization’s capital accounts during a specific period

Answer 18

Statement of changes in shareholder’s equity

Question 19

What are the four major components of shareholders’ equity?

Answer 19

Paid-in capital, retained earnings, accumulated other comprehensive income, and treasury stock

Question 20

The total amount invested in an organization by the owners. Calculated as the par value of the stock issued plus any additional over the par value.

Answer 20

Paid-In Capital

Question 21

A corporate stock issued as fully paid to a stockholder and subsequently reacquired by the corporation to use for business purposes.

Answer 21

Treasury stock

Question 22

The financial statement that summarizes the cash effects of an organization’s operating, investing, and financing activities during a specific period

Answer 22

Statement of cash flows

Question 23

What are the three sections of the statement of cash flows?

Answer 23

Operating activities, Investing activities, and Financing activities

Question 24

An accounting method that spreads out the expense of a purchase over the life expectancy of the item

Answer 24

Depreciation expense

Question 25

Contain additional details that are disclosed to explain or amplify the information presented in the financial statements.

Answer 25

Notes to the Financial Statements

Question 26

An existing condition, situation or set of circumstances involving uncertainty as to a gain or a loss to a company.

Answer 26

Contingency

Question 27

Form required to be filed annually with the SEC by publicly traded companies. Similar to their annual report except that it contains more-detailed information about the company’s business, finances, and management. Also includes info such as company bylaws and other legal documents.

Answer 27

Form 10-K

Question 28

An abbreviated version of the 10-K report that publicly traded companies must file quarterly. Includes unaudited financial statements, Management Discussion & Analysis for the quarter, and a list of material events that have occurred within the company for the past 3 months

Answer 28

Form 10-Q

Question 29

The “current report” that publicly traded companies must file within four days of a major event to announce it to shareholders.

Answer 29

Form 8-K

Question 30

A formal report on the company’s performance for the stated year

Answer 30

Annual report

Question 31

A report to the users of the financial statements signed by the chairman of the board and the chief financial officer in which the company’s management acknowledges its responsibility for the quality and integrity of the company’s financial statements.

Answer 31

Report of Management

Question 32

Report used to explain the company’s operating results and condition. It should also provide insight into the opportunities, challenges, and risks faced by the company as well as the actions being taken to address them.

Answer 32

Management Discussion & Analysis of Results (MD&A)

Question 33

The provision of sufficient detail regarding transactions to enable a prudent investor to understand the economic effect of those transactions on the company’s financial statements.

Answer 33

Transparency

Question 34

What are two significant limitations of financial statements?

Answer 34

• They do not measure the economic value of qualitative assets
• They do not give the current fair (market) value of all the organization’s assets and liabilities

Question 35

Intangible items an organization develops such as its marketplace reputation, brand recognition, management team strength, or productive workforce. Not currently measured by financial statements.

Answer 35

Qualitative assets