exam 1

Question 1

Operating

Answer 1

cash flows that directly relate to earning income (revenue and expenses)

Question 2

Investing

Answer 2

cash flows related to the acquisition or sale of the company’s productive assets (assets related to the business)

Question 3

Financing

Answer 3

cash flows directly related to the receipt of money from investors and creditors and payment of money to investors and creditors (not suppliers)
If people buy your stock; if you take out a loan from a bank

Question 4

balance sheet

Answer 4

A = L + SE

Question 5

income statement

Answer 5

revenue - expenses = net income

Question 6

Statement of retained earnings

Answer 6

Beginning retained earnings + net income - net loss - dividends = ending retained earnings

Question 7

Statement of cash flows

Answer 7

+/- cash flow from operating activities
+/- cash flow from investing activities
+/- cash flow from financing activities
= net change (increase or decrease) in cash

Question 8

Current Assets

Answer 8

assets that a company expects to be converted to cash within one year or one operating cycle, whichever is longer
Listed in order of liquidity

Question 9

Long Term Investments

Answer 9

Stocks and bonds held for long-term investment ( > one year)
Property, plant, and equipment and / or land NOT currently used in operations of the business (purchased and held for investment only)
Long-term notes receivable

Question 10

Property, Plant, and Equipment (PP&E)

Answer 10

(or fixed assets) assets used in operations of the business
Ex: land, buildings, equipment, machinery, etc.
Items usually have long useful lives
- accumulated depreciation

Question 11

depreciation

Answer 11

spread the cost of purchasing the asset over the number of years the company expects to use the asset
- Cost is called depreciation expense and goes with other expenses on the I/S

Question 12

accumulated depreciation

Answer 12

running total of the amount of depreciation expense

Question 13

Intangible Assets

Answer 13

assets which have no physical substance and represent long-lived exclusive rights or privileges
- some are amortized

Question 14

amortization

Answer 14

spread the cost of the asset over the number of years the company expects to use the asset
- Some intangibles will be used “forever” - these are NOT amortized

Question 15

accumulated amortization

Answer 15

running total of the amount of amortization expense

Question 16

current liabilities

Answer 16

obligations that are expected to be paid within one year or one operating cycle, whichever is longer

Question 17

long-term liabilities

Answer 17

obligations that are expected to be paid after one year

Question 18

stockholder’s equity

Answer 18

Common stock: investments of assets into the business by stockholders
Retained earnings: income retained for future use in the business

Question 19

earnings per share

Answer 19

measures net income earned on each share of common stock

Net income - Preferred Dividends / Weighted average common shares outstanding

Question 20

earnings per share is a measure of _____

Answer 20

profitability

Question 21

Debt-to-assets ratio

Answer 21

measures the proportion of the business that is financed by creditors (rather than stockholders)
The higher the percentage of debt financing, the riskier the business
Lower is better

Total liabilities /Total Assets

Question 22

Debt-to-assets ratio is a measure of ______

Answer 22

solvency

Question 23

DEA

Answer 23

↑ Debit, ↓ Credit

Question 24

LER

Answer 24

↓ Debit, ↑ Credit

Question 25

General rules for accrual basis

Answer 25

Revenue is recognized when earned

Expenses are recognized when incurred

Question 26

Revenue Recognition Principle

Answer 26

revenue is recognized when it is earned without regard to when payment (cash) is received

Question 27

Expense Recognition Principle

Answer 27

expenses are the cost of the goods and services used up in the process of earning revenue

Question 28

Matching principle

Answer 28

revenue earned should be matched (offset) with the expenses incurred in the same period
“Let the expenses follow the revenues”

Question 29

Interest expense

Answer 29

$ borrowed X interest rate X # months / 12

Question 30

Depreciation expense

Answer 30

(cost - salvage) / useful life

Question 31

Closing entries

Answer 31

• at the end of the year you must “move” (close) the balances in all Income Statement accounts (revenues, expenses, gains, or losses) and the Dividend account into Retained Earnings
• Means that the income statement (temporary) accounts start the next year with $0 balances (zero out income statement accounts at the end of each period)
• Do NOT close any of the Balance Sheet (these are permanent accounts)