Chapter 2 Reading Notes

Question 1

how many financial statements are there?

Answer 1

four

Question 2

what are the four financial statements?

Answer 2

statement of stockholder’s equity
statement of financial position
statement of profit and loss
statement of cashflows

Question 3

who are financial statements required by and who reports them?

Answer 3

required by GAAP
reported by companies

Question 4

what does the balance sheet show?

Answer 4

assets, liabilities & equity at a single point in time

Question 5

what does the income statement show?

Answer 5

revenue & expenses over time

Question 6

net income = ?

Answer 6

revenue - expenses

Question 7

what does the cash flow statement show?

Answer 7

how cash changes hands over time

Question 8

what does the statement of stockholder’s equity show?

Answer 8

how equity has changed hands over time

Question 9

do all companies do a statement of retained earnings?

Answer 9

no, only some do

Question 10

retained earnings = ?

Answer 10

where all accumulated profits are stored

Question 11

what is the flow of financial statements?

Answer 11

income statement calculates net income

net income goes into the statement of changes in equity

equity from there is put onto the balance sheet

all of those statements go into preparing the cash flow statement

Question 12

what are the 5 account classifications?

Answer 12

asset, liability, equity, revenue, expense

Question 13

where are assets found and what are some examples?

Answer 13

on the balance sheet

cash, PPE, inventory, A/R, land, etc.

Question 14

where are liabilities found and what are some examples?

Answer 14

balance sheet

N/P, A/P, accrued expenses, unearned revenue

Question 15

where is equity found and what are some examples?,

Answer 15

found on the balance sheet

common/preferred stock, APIC, retained earnings, treasury stock

Question 16

treasury stock = ?

Answer 16

stock that the company has bought back

Question 17

what is APIC?

Answer 17

additional paid-in capital

additional pay from an investor for a stock

Question 18

revenue is found in the …

Answer 18

income statement

Question 19

expenses are found in the…

Answer 19

income statement

Question 20

what 3 questions do financial statements address?

Answer 20

what cash movements took place?

how much wealth was generated?

what is the accumulated wealth of the business at the end of the period?

Question 21

what does the SOCF portray?

Answer 21

cash introduced (opening balance)
cash from sales (cash in)
cash paid (cash out)
closing balance

Question 22

what question does the SOCF answer?

Answer 22

what cash movements took place

Question 23

what question does the P&L answer?

Answer 23

how much wealth was generated

Question 24

what question does the SOFP answer?

Answer 24

what is the accumulated wealth of the business

Question 25

where are profits put?

Answer 25

in retained earnings (an owner's equity account)

Question 26

cash is described as the business's ...

Answer 26

lifeblood

Question 27

what are the 3 main financial statements and what are they referred to as?

Answer 27

SOCF, P&L, SOFP 'final accounts'

Question 28

what are the various forms of economic benefit?

Answer 28

cash generated cash received value received

Question 29

what is a claim?

Answer 29

an obligation to provide cash

Question 30

what are the 2 types of claims?

Answer 30

equity (owner's claims against assets) liabilities (3rd parties' claims against assets)

Question 31

what is a reporting period?

Answer 31

the timespan for which a business prepares its financial statements

Question 32

what are current/non-current assets

Answer 32

current = held short-term, intended to liquidate within 1 year non-current = held long-term, intended for continuous use, not liquidated within 1 year

Question 33

what is an operating cycle?

Answer 33

the time between buying, preparing and selling a product

Question 34

when a transaction occurs, should I assume it's on credit or paid by cash?

Answer 34

always assume it's on credit unless stated otherwise most business's sales are made on credit except retailers

Question 35

what is the flow of a trading transaction?

Answer 35

inventory -> A/R -> cash

Question 36

what are current/non-current liabilities?

Answer 36

debt obligations expected to be settled within/longer than one year

Question 37

what happens if a business can't fulfil long-term debts?

Answer 37

they can be forced to stop trading

Question 38

define accounting conventions

Answer 38

one of the generally accepted rules that accountants tend to follow when preparing financial statements

Question 39

what are the 5 accounting conventions?

Answer 39

business entity historic cost prudence going concern dual-aspect

Question 40

what is business entity?

Answer 40

recognising the business as a separate legal entity to its' owners (unless its a partnership or sole trader)

Question 41

what is historic cost?

Answer 41

value of assets must be presented at the cost at which they were bought - acquisition price

Question 42

what is prudence?

Answer 42

caution toward financial statements must be exercised at all times

Question 43

what is going concern?

Answer 43

assuming that a business will continue its operations for the foreseeable future unless there's reason to believe otherwise

Question 44

what is dual-aspect?

Answer 44

each transaction has 2 aspects that will impact both sides of the SOFP

Question 45

current replacement cost = ?

Answer 45

how much I would get for an asset if I were to sell it now according to its current market value

Question 46

realisable value = ?

Answer 46

price someone is willing to pay for an asset

Question 47

neutrality = ?

Answer 47

no bias a desirable accounting characteristic

Question 48

what 3 characteristics make up faithful representation?

Answer 48

neutrality, completeness, freedom from error

Question 49

good will = ?

Answer 49

an intangible asset used to describe payment for things like good customer service, good product quality etc.

Question 50

tangible assets depreciate, intangible assets...?

Answer 50

amortise

Question 51

fair value = ?

Answer 51

the value ascribed to an asset as an alternative to historic cost

Question 52

impairment loss = ?

Answer 52

the loss of an asset's value as a result of fundamental changes (e.g., change in market conditions)

Question 53

what information does the SOFP provide?

Answer 53

insight into finances & how funds are deployed basis for assessing value of the business gauge relation between assets & claims

Question 54

carrying amount = ?

Answer 54

the difference between the cost and the accumulated depreciation related to an asset