Cycle 2

Question 1

Financial Statements

Answer 1

• The Balance Sheet, Income Statement, and Statement of Cash Flows are a
  firm’s primary statements.
• The 3 primary statements highlighted above plus the Statement of Owners’
  Equity and the firm’s Note Disclosures are collectively referred to as the firm’s
  “Financial Statements

Question 2

Statement of Cash Flows

Answer 2

The Statement of Cash Flows shows the cash into and out of the firm, i.e. the
Cash account from the Ledger (or Balance Sheet).

Question 3

3 Categories of Cash Flows

Answer 3

Operating cash flows, investing cash flows, and financing cash flows

Question 4

Gains

Answer 4

Similar to revenues, but they are the result of peripheral activities that are not central and ongoing activities of the firm.

Question 5

Losses

Answer 5

Mirror images of Gains. Similar to negative revenue, but they are the result of peripheral activities that are not central and ongoing activities of the firm.

Question 6

Revenue Principle

Answer 6

Stipulates that one books (records, recognizes,
journalizes) revenue when it is earned and it is realized or realizable . By realizable , it means that the receivable will likely turn into cash. Also, it requires that a company recognize revenue (1) when the company transfers promised goods or services to customers (2) in the amount it expects to be entitled to receive.

Question 7

Accrual Accounting

Answer 7

Revenues are recognized when goods and services are provided to customers (they are earned), and expenses are recognized in the same period as the revenues to which they relate (resources are used or debts are incurred to generate revenues), regardless of when cash is received or paid. Two principles, the Revenue principle and the Expense Principle, are the basis of Accrual Accounting.

Question 8

Expense Principle

Answer 8

The Expense Recognition Principle (also called the matching principle) requires that costs incurred to generate revenues be recognized in the same period - matching costs with benefits.

Question 9

Fair Value Accounting

Answer 9

• The purpose of Fair Value Accounting is to show current market values,
  because they are deemed relevant even though they may not be very reliable
  and go against general conservative accounting principles.
• Fair Value Accounting is an accounting system that is “bolted on” to the Accrual Accounting system. It requires the recognition of unrealized losses and
  unrealized gains for certain select assets and liabilities.
• It is “non transactions based” since the gains and losses are from changes in value and not from transactions with independent parties.

Question 10

Intangibles - Identifiable

Answer 10

• Patents [Amortizable
  (definite life)]
• Trademarks [Non
  amortizable
  (indefinite life)]

Question 11

Intangibles - Non-Identifiable

Answer 11

Goodwill [Non amortizable
(indefinite life)]

Question 12

Operating Cash Flow…

Answer 12

Create revenue, expenses, gains and losses.

Question 13

Investing Cash Flow…

Answer 13

Relate to non-current assets

Question 14

Financing Cash Flow…

Answer 14

Obtain cash from and pay cash to investors and creditors

Question 15

Direct Cash Flow Statement

Answer 15

Reports all cash receipts and cash payments from operating activities (from the Ledger)

Question 16

Indirect Cash Flow Statement

Answer 16

Reconciles from net income to cash provided by operating activities as reported in the Income Statement and Balance Sheet

Question 17

Cash Flow from Operating Activities - Categories

Answer 17

“O+” or “O-“

+ Net Income
+ Depreciation / Amortization expense(s)
+ Loss on sale of long-term assets
- Gain on sale of long-term assets
- Increases in current assets other than cash
+ Decreases in current assets other than cash
+ Increases in current liabilities
- Decreases in current liabilities

= Net cash provided by operating activities

Question 18

Cash Flow from Investing Activities - Categories

Answer 18

“I+” or “I-“

+ Sales of long-term assets
- Purchases of long-term assets
+ Collections on notes receivable
- Loans to others

= Net case provided by (used for) investing activities

Question 19

Cash Flow from Financing Activities - Categories

Answer 19

“F+” or “F-“

+ Issuance of shares
- Purchase of treasury shares
+ Borrowing
- Payment of notes and bonds payable
- Payment of dividends

= Net cash provided by (used in) financing activities

Question 20

Indirect Method: Preparing the Statement of Cash Flows (core components)

Answer 20

+ Net cash provided by operating activities
+ Net cash from investing activities
+ Net cash provided by financing activities
= Net increase in cash

Question 21

Intangible

Answer 21

Intangible are assets that have special rights but not physical substance. Are composed of Identifiable and Non-Identifiable Intangibles

Question 22

Goodwill

Answer 22

For accounting purposes, the excess of the purchase price of a acquired business over the fair value of the acquired business’s assets and liabilities.
= Total Amount Paid- (Fair value of target’s assets - Fair value of target’s liabilities.
• Why pay more than fair value? “Synergies”

Question 23

Timing of financial statements: Point in time

Answer 23

• Balance Sheet

Question 24

Timing of Financial Statements: Period of Time

Answer 24

• Income Statement
• Statement of Cash Flows

Question 25

Amortization

Answer 25

Systematic and rational allocation of the acquisition cost of an intangible asset over its useful life.

Question 26

Balance Sheet components

Answer 26

• Current Assets
• Non-Current Assets
• Total Assets

• Current Liabilities
• Non-Current Liabilities
• Total Liabilities

• Owner’s Equity
• Stock
• Retained Earnings
• Total Owners Equity

• Total Liabilities & Owners’ Equity

Question 27

Retained Earnings

Answer 27

The amount of earnings (profits) reinvested in the business (and thus not distributed to stockholders in the form of dividends).
• Financing provided by operations is referred to as earned capital or retained earnings.
• Simply - The portion of profits (Net Profit) reinvested in the business is called Retained Earnings.

Question 28

Income Statement components

Answer 28

• Sales
• COGS
• SG&A Expense
• Interest Expense
• Income Tax Expense
• Net Income
• Dividends