Chapter 2 Reading Notes Flashcards
how many financial statements are there?
four
what are the four financial statements?
statement of stockholder’s equity
statement of financial position
statement of profit and loss
statement of cashflows
who are financial statements required by and who reports them?
required by GAAP
reported by companies
what does the balance sheet show?
assets, liabilities & equity at a single point in time
what does the income statement show?
revenue & expenses over time
net income = ?
revenue - expenses
what does the cash flow statement show?
how cash changes hands over time
what does the statement of stockholder’s equity show?
how equity has changed hands over time
do all companies do a statement of retained earnings?
no, only some do
retained earnings = ?
where all accumulated profits are stored
what is the flow of financial statements?
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
what are the 5 account classifications?
asset, liability, equity, revenue, expense
where are assets found and what are some examples?
on the balance sheet
cash, PPE, inventory, A/R, land, etc.
where are liabilities found and what are some examples?
balance sheet
N/P, A/P, accrued expenses, unearned revenue
where is equity found and what are some examples?,
found on the balance sheet
common/preferred stock, APIC, retained earnings, treasury stock
treasury stock = ?
stock that the company has bought back
what is APIC?
additional paid-in capital
additional pay from an investor for a stock
revenue is found in the …
income statement
expenses are found in the…
income statement
what 3 questions do financial statements address?
what cash movements took place?
how much wealth was generated?
what is the accumulated wealth of the business at the end of the period?
what does the SOCF portray?
cash introduced (opening balance)
cash from sales (cash in)
cash paid (cash out)
closing balance
what question does the SOCF answer?
what cash movements took place
what question does the P&L answer?
how much wealth was generated
what question does the SOFP answer?
what is the accumulated wealth of the business
where are profits put?
in retained earnings (an owner’s equity account)
cash is described as the business’s …
lifeblood
what are the 3 main financial statements and what are they referred to as?
SOCF, P&L, SOFP
‘final accounts’
what are the various forms of economic benefit?
cash generated
cash received
value received
what is a claim?
an obligation to provide cash
what are the 2 types of claims?
equity (owner’s claims against assets)
liabilities (3rd parties’ claims against assets)
what is a reporting period?
the timespan for which a business prepares its financial statements
what are current/non-current assets
current = held short-term, intended to liquidate within 1 year
non-current = held long-term, intended for continuous use, not liquidated within 1 year
what is an operating cycle?
the time between buying, preparing and selling a product
when a transaction occurs, should I assume it’s on credit or paid by cash?
always assume it’s on credit unless stated otherwise
most business’s sales are made on credit except retailers
what is the flow of a trading transaction?
inventory -> A/R -> cash
what are current/non-current liabilities?
debt obligations expected to be settled within/longer than one year
what happens if a business can’t fulfil long-term debts?
they can be forced to stop trading
define accounting conventions
one of the generally accepted rules that accountants tend to follow when preparing financial statements
what are the 5 accounting conventions?
business entity
historic cost
prudence
going concern
dual-aspect
what is business entity?
recognising the business as a separate legal entity to its’ owners
(unless its a partnership or sole trader)
what is historic cost?
value of assets must be presented at the cost at which they were bought - acquisition price
what is prudence?
caution toward financial statements must be exercised at all times
what is going concern?
assuming that a business will continue its operations for the foreseeable future
unless there’s reason to believe otherwise
what is dual-aspect?
each transaction has 2 aspects that will impact both sides of the SOFP
current replacement cost = ?
how much I would get for an asset if I were to sell it now according to its current market value
realisable value = ?
price someone is willing to pay for an asset
neutrality = ?
no bias
a desirable accounting characteristic
what 3 characteristics make up faithful representation?
neutrality, completeness, freedom from error
good will = ?
an intangible asset used to describe payment for things like good customer service, good product quality etc.
tangible assets depreciate,
intangible assets…?
amortise
fair value = ?
the value ascribed to an asset as an alternative to historic cost
impairment loss = ?
the loss of an asset’s value as a result of fundamental changes (e.g., change in market conditions)
what information does the SOFP provide?
insight into finances & how funds are deployed
basis for assessing value of the business
gauge relation between assets & claims
carrying amount = ?
the difference between the cost and the accumulated depreciation related to an asset
