Chapter 2--The Basic Financial Statements Flashcards
According to FASB, what constitutes the complete set of financial statements?
- Financial position at the end of the period
- Cash flows for the period
- Earnings for the period
- Comprehensive income for the period
- Investments by and distributions to owners during the period
What is an asset?
Economic resources or a firm, used to produce future cash inflow
What is a liability?
Debts of an enterprise, usually used to acquire assets
What is owners’ equity?
The residual claims of owners on the assets of a firm. The net assets of a firm after debts are accounted for–what an owner would take from the company if it closed and all debts were paid
What is the accounting equation?
Assets = liabilities + owners’ equity
or
Resources of an enterprise = claims on the resources
or
Assets = sources of assets
or
(Current Assets + Non-Current Assets) = (Current Liabilities +Non-Current Liabilities + Owners’ Equity)
What goes in the heading of a financial statement?
The company’s name, the name of the financial statement, and the date.
What does the balance sheet contain?
Assets, Liabilities, and Owners’ Equity–a snapshot in time
What is a current asset?
Assets that are expected to be converted into cash within a year as a result of the day-to-day operations
What is a current liability?
A liability that is expected to be paid within one year
What does the “Cash” account include on the balance sheet?
Cash on hand, checks on hand, cash in the bank, short term marketable securities
What does the “Accounts Receivable” asset include on the balance sheet?
Cash due from customers who have purchased goods or services on credit, with allowances made for noncollectable accounts
What is the “Inventory” asset on the balance sheet?
Cost of the inventory on hand
What is the adjusted equipment cost?
Acquisition cost less depreciation
Are land and buildings listed at purchase price or current market price?
Whichever is lower (conservatism principle)
What does the “Accounts Payable” liability include on the balance sheet?
The amount owed to suppliers or goods and services
How is “Owners’ Equity” divided on the Balance Sheet?
Capital stock and retained earnings
What is capital stock?
The amount owners have directly invested in the company, at the time of purchase of stock
What are retained earnings?
Total cumulative amount of earnings the company has retained and invested in its operations
What does the income statement contain?
Revenues and expenses from a given period, to provide information for the evaluation of a company’s financial performance over a period of time
What is a revenue?
Income earned for providing a good or service–cause owners’ equity to increase
What is an expense?
Costs incurred by the process of generating revenues–cause owners’ equity to decrease
How is the net income for a period calculated?
Total revenue for a period less the total expense for that same period
What is the accrual method of accounting?
That revenues and expenses are recognized only during the period they were performed, regardless of whether money actually changed hands during that period
What is the cash method of accounting?
That revenue and expenses are recognized only when cash changes hands
What is the cost of goods sold on an income statement?
The actual cost of acquiring and selling (salesmen wages included!) the goods that were sold
What is the Gross Margin?
The difference between the firm’s net sales and the cost of goods sold
What are included in Operating Expenses on an income statement?
Rent, utilities, insurance, salaries, advertising, promotion, costs of running the administrative office
What is Income from Operations?
Gross Margin less Operating Expenses
What is Net Income on an Income Statement?
The total amount earned after all expenses have been accounted for–the change in the owners’ equity for the period
What is the purpose of the Statement of Retained Earnings?
To show how Net Income was used over a period, either to pay as dividends to owners, or reinvested into the company as retained earnings
Are Dividends considered an expense?
No, so they do not show up on the Income Statement
What types of activities are included in Retained Earnings?
Sales
Cost of Goods Sold
Salaries
Interest Expense
