Chapters 1-6

Question 1

Which decision makers is financial accounting designed for?

Answer 1

External/Outside the company

Question 2

Which decision maker is managerial accounting designed for?

Answer 2

Internal/those inside the company

Question 3

Define Accounting

Answer 3

The process of 
1. recording, 
2. summarizing, and 
3. analyzing 
financial transactions.

Question 4

What is the Accounting Equation?

Answer 4

Assets=Liabilities+Equity

Or

What We Own=What We Owe+What Remains

Or

Investing=Creditor Financing+Owner Financing

Question 5

What are the four key financial statements?

Answer 5

1. Balance sheet
2. Income statement
3. Statement of stockholders’ equity
4. Statement of Cash Flows

Question 6

What is the balance sheet and what does it do?

Answer 6

The balance sheet lists the company’s economic resources as of a certain date. It uses the accounting equation of

Assets=Liabilities+Equity

to tell us where their economic resources are coming from.

Question 7

What is the Income Statement?

Answer 7

The income statement reports the results of a company’s operating activities over a specific period of time. AKA P&L

Question 8

What is the Statement of Stockholders’ Equity?

Answer 8

The statement of stockholders’ Equity reports on changes in equity over a period of time.

Question 9

What is the statement of cash flows and why is it important?

Answer 9

The statement of cash flows reports cash flows from

1. Operating,
2. Investing,
3. Financing

activities over a period of time.

It is critical because you can’t hide anything. If you don’t show adequate records, you get a Qualified opinion at audit.

Question 10

Why is cash important?

Answer 10

It is used to purchase resources and pay bills.

Question 11

What is Operating Cash Flows?

Answer 11

Amount of cash generated from operating activities.

Question 12

How does Operating Cash Flow differ from Net Income?

Answer 12

The difference is due to the time difference between when revenues and expenses are recorded and when cash is received and paid.

Question 13

What is the Articulation of Financial Statements?

Answer 13

The linkage between the four key financial statements.

Question 14

Name the business activities of a company.

Answer 14

A company

1. Plans activities
2. Finances those activities
3. Invests resources into those activities, then
4. Engages in operating activities

Question 15

What is the primary goal of a company?

Answer 15

Create value for its owners.

Question 16

Which key financial documents report a company’s position over a period of time?

Answer 16

1. Income Statement
2. Statement of Stockholders’ Equity
3. Statement of Cash Flows

Question 17

Which key financial documents report a company’s position at a particular point in time?

Answer 17

1. Balance Sheet

Question 18

What is net income?

Answer 18

The increase in equity after subtracting expenses from revenues.

Question 19

What three components make up Cost of Goods Sold?

Answer 19

1. Labor
2. Materials
3. Overhead

Question 20

What is Contributed Capital on the Statement of Stockholders’ Equity?

Answer 20

The amount received from issues new stock during a period of time. It can include common stock and other paid-in capital.

Question 21

What is Retained Earnings?

Answer 21

Cumulative income since company inception less dividends paid out to shareholders.