Chapter 2: The Overview of Financial Statements

Question 1

Assets=Liabilities + Owners’ Equity

Answer 1

Accounting Equation

Question 2

The source of those increased assets

Answer 2

Accumulated Other Comprehensive Income

Question 3

The firm’s economic resources, formally defined as “probably future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

Answer 3

Assets

Question 4

A statement of financial position shows the financial resources the company owns or controls and the claims on those resources

Answer 4

Balance Sheet

Question 5

The asset’s cost minus the asset’s accumulated depreciation

Answer 5

Book Value

Question 6

Information that becomes much more useful when it can be related to a benchmark or standard

Answer 6

Comparability

Question 7

A pervasive factor in accounting, can be summarized as follows: When in doubt, recognize all losses but don’t recognize any gains

Answer 7

Conservatism

Question 8

Once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods

Answer 8

Consistency

Question 9

The notes that accompany the financial statement

Answer 9

Disclosure

Question 10

Tells the owner of one share of stock what they really want to know

Answer 10

Earnings Per Share (EPS)

Question 11

The idea that personal financial activity is kept separate from business financial activity

Answer 11

Entity Concept

Question 12

The amount of assets consumed from the performance of business operations and thus are the opposite of revenues

Answer 12

Expenses

Question 13

Those activities whereby cash is obtained from, or repaid to, owners and creditors

Answer 13

Financing Activities

Question 14

Refers to money made on activities outside the normal business of a company

Answer 14

Gains

Question 15

Allows the readers of financial statements to assume that the company will continue on long enough to carry out its objectives and commitments

Answer 15

Going Concern Assumption

Question 16

An accounting technique that values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition

Answer 16

Historical Cost Convention

Question 17

A company’s financial performance for a specified period of time

Answer 17

Income Statement

Question 18

The purchase and sale of land, buildings, and equipment. Investing activities also include buying and selling of other companies

Answer 18

Investing Activities

Question 19

The future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events

Answer 19

Liabilities

Question 20

The ease to which the item can be turned into cash

Answer 20

Liquidity

Question 21

Money lost on activities outside the normal business of a company

Answer 21

Losses

Question 22

The question of whether an item is large enough to many any difference to anyone

Answer 22

Materiality

Question 23

Total Assets minus total liabilities. In a sole proprietorship, the amount is reported as owner’s equity. In a corporation, they are reported as stockholder’s equity.

Answer 23

Net Assets

Question 24

The difference between revenue and expenses when revenues exceed expenses

Answer 24

Net Income

Question 25

The difference between revenue and expenses when expenses exceed revenue

Answer 25

Net Loss

Question 26

These provide additional information pertaining to a company’s operations and financial position and are considered to be an integral part of the financial statements

Answer 26

Notes to Financial Statements

Question 27

Those activities involved in producing and selling goods and services and thus compromise the day-to-day business of a company

Answer 27

Operating Activities

Question 28

The owners’ residual interest in the assets of a firm

Answer 28

Owners’ Equity

Question 29

The value of the assets given in exchange for shares of stock

Answer 29

Paid-in Capital

Question 30

A breaking down of all of the estimates and judgements into one number and reporting that number in the financial statement

Answer 30

Recogition

Question 31

A qualitative characteristic in accounting. Associated with information that is timely, useful, has predictive value, and is going to make a difference to a decision maker

Answer 31

Relevance

Question 32

A qualitative characteristic in accounting. Achieved when information is verifiable, objective, and you can depend on it

Answer 32

Reliability

Question 33

Represent the portion of stockholders’ equity (resulting from cumulative profitable operations) that has not been paid to the owners as dividends

Answer 33

Retained Earnings

Question 34

The amount of assets created through the performance of business operations

Answer 34

Revenue

Question 35

A generally accepted accounting principle (GAAP) that determines the specific conditions in which revenue is recognized or accounted for

Answer 35

Revenue Recognition

Question 36

Individual cash flow items that are classified according to three main activities: operating, investing, and financing

Answer 36

Statement of Cash Flows

Question 37

The portion of the balance sheet that represents the capital received from investors in exchange for stock (paid-in capital), donated capital and retained earnings

Answer 37

Stockholders’ Equity

Question 38

The time period principle is the concept that a business should report the financial results of its activities over a standard time period, which is usually monthly, quarterly, or annually

Answer 38

Time Period Concept

Question 39

Shown as a subtraction in the stockholder’s equity section of the balance sheet

Answer 39

Treasury Stock