Financial Reporting Basics - Ch. 1 Flashcards
What are the different types of financial statements? Describe their purpose.
Balance sheet: Lists company investments and sources of financing using accounting equation
Income statement: reports results of major sources of profit (revenue) and costs operating activities over a period of time
Statement of stockholders equity: reports the changed in the equity accounts over a period of time (detail changes in owner financing)
Statement of cash flows: details sources and uses of cash
What is the accounting (balance sheet) equation?
Describe the business activity related to each.
Assets(investing) = Liabilities (Financing) + Equity (Owner financing)
Define Liability
financing obligations the company must repay in the future,compiling up of debt and accounts payable
Needing to be paid within one year
Define an Asset
Anything that can be liquidated into cash and other term investments
Cash and other assets (non-cash) that are expected to be converted to cash within one year
What do operating activities refer to
Production, promotion, and selling of a company’s products and services
Define revenue
Increase in equity resulting from the sale of goods (products) and services to customers
It is determined BEFORE deduction expenses
Define Expense
cost incurred to generate revenue
Define Income
also known as net income ( net increase in equity from company’s activities) which is equal to revenue -expenses
How are financial statements linked across time?
- Balance Sheet is the beginning of period ( Point in time)
- Statement of cash flows, Statement of equity, income statement = period of time
- Balance sheet (end of period )
**this cycle continues - like a movie
What is a fiscal year vs Calendar year
Fiscal year = just one year or annual accounting period
Calendar year = reporting period beginning Jan 1 ends Dec 31
Define Equity / stockholders equity.
What financial statement does it belong and what is it considered on a T-account?
Equity compiles contributed capital, retained earnings, other stockholders equity is also referred to as shareholders equity, owners equity, equity, “net worth”
Stockholders equity are resources remaining after deducting liabilities from assets including contributed capital and earned capital
Found on the Balance sheet as part of Equity
Define cost of goods sold (COGS)
What financial statement does it belong and what is it considered on a T-account?
cost of products including direct materials, labor costs and overhead
Belongs on the income statement
Define gross profit ( found on income statement)
Also gross margin = revenue - cost of goods sold (COGS)
Define Retained earnings (earned Capital)
profit or income of the company earned over time that has been “retained” in the business rather than distributed to shareholders as dividends
define Contributed capital (paid in capital)
Money received and returned for ownership shares in a company aka people bought stock = is the amount of money ( from selling stocks ) for company to turn into cash
Define Accounts Receivable?
What financial statement does it belong and what is it considered on a T-account?
it is the money customers owe for products and services, product/service has been delivered and not yet paid for.
This is considered an Asset found on the balance sheet
Define Inventory?
What financial statement does it belong and what is it considered on a T-account?
completed products waiting to be shipped, product supplies, and partially completed products.
This is considered an Asset found on the balance sheet
Define Accounts Payable?
What financial statement does it belong and what is it considered on a T-account?
bills due for goods and services that have been performed. A delayed payment as a source of borrowing from suppliers.
This is considered a liability found on the balance sheet
Define Debt?
What financial statement does it belong and what is it considered on a T-account?
Mostly considered bank loans
This is considered a liability found on the balance sheet.
what are the financial statement linkages, describe them
The statement of cash flows links the beginning and ending cash in the balance sheet.
**Assets –> beginning cash (at end of Cash flow statement) to get end of period of Cash –> End of Cash flow statement ends up being the asset cash for following Balance sheet.
The income statement links the beginning and ending retained earnings in the statement of stockholders’ equity.
- *Liabilities stock holders equity from beginning balance sheet –> beginning /starting amount to statement of stockholders equity sheet
- Net income from from income statement is taken to the statement of stockholders and subtracted from stockholders equity of previous year
The statement of stockholders’ equity links the beginning and ending equity in the balance sheet
**Ending amount of stockholders equity ends up being the liability stockholders equity on the “ending” balance sheet
describe the difference between short term and long term assets
Short term assets are resources used quickly such as inventory
Long term assets are resources used over long periods of time such as equipment
What is GAAP?
Why do we need it?
Who determines it?
What is GAAP based on?
rules used in the United States to prepare external financial statements for reporting to the Securities & Exchange Commission (SEC) and shareholders
To understand the figures reported on financial statements.
For comparability of different firms’ financial statements
SEC (Securities and Exchange Commission)
FASB (Financial Accounting Standards Board)
AICPA (American Institute of Certified Public Accountants)
consensus of accountants on acceptable procedures
what are the three major business activites?
Operating, investing and financing
What else does the balance sheet referred to as?
Statement of financial position or statement of financial condition at ONE point in time.
Define Account
a record that summarizes the changes in the balances of assets, liabilities and stockholders equity.
What is the difference between book value and market value.
book value is the value reported on the balance sheet, determined by GAAP, equals acquisition costs
Market value is the selling/replacements price today based on supply and demand and most balance sheets items are not reported at this value
What is the equation for return on equity?
Return on equity = ( net income / average stockholders’ equity)
What is the equation to debt to equity ratio?
Debt to equity ratio = (Total Liabilities / Total stockholders’ equity)
Define Blockchain
a distributed digital ledger that provides a secure means for approved parties to view recorded transactions
