Financial Reporting Basics - Ch. 1

Question 1

What are the different types of financial statements? Describe their purpose.

Answer 1

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

Question 2

What is the accounting (balance sheet) equation?

Describe the business activity related to each.

Answer 2

Assets(investing) = Liabilities (Financing) + Equity (Owner financing)

Question 3

Define Liability

Answer 3

financing obligations the company must repay in the future,compiling up of debt and accounts payable
Needing to be paid within one year

Question 4

Define an Asset

Answer 4

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

Question 5

What do operating activities refer to

Answer 5

Production, promotion, and selling of a company’s products and services

Question 6

Define revenue

Answer 6

Increase in equity resulting from the sale of goods (products) and services to customers
It is determined BEFORE deduction expenses

Question 7

Define Expense

Answer 7

cost incurred to generate revenue

Question 8

Define Income

Answer 8

also known as net income ( net increase in equity from company’s activities) which is equal to revenue -expenses

Question 9

How are financial statements linked across time?

Answer 9

1. Balance Sheet is the beginning of period ( Point in time)
2. Statement of cash flows, Statement of equity, income statement = period of time
3. Balance sheet (end of period )

**this cycle continues - like a movie

Question 10

What is a fiscal year vs Calendar year

Answer 10

Fiscal year = just one year or annual accounting period

Calendar year = reporting period beginning Jan 1 ends Dec 31

Question 11

Define Equity / stockholders equity.

What financial statement does it belong and what is it considered on a T-account?

Answer 11

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

Question 12

Define cost of goods sold (COGS)

What financial statement does it belong and what is it considered on a T-account?

Answer 12

cost of products including direct materials, labor costs and overhead
Belongs on the income statement

Question 13

Define gross profit ( found on income statement)

Answer 13

Also gross margin = revenue - cost of goods sold (COGS)

Question 14

Define Retained earnings (earned Capital)

Answer 14

profit or income of the company earned over time that has been “retained” in the business rather than distributed to shareholders as dividends

Question 15

define Contributed capital (paid in capital)

Answer 15

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

Question 16

Define Accounts Receivable?

What financial statement does it belong and what is it considered on a T-account?

Answer 16

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

Question 17

Define Inventory?

What financial statement does it belong and what is it considered on a T-account?

Answer 17

completed products waiting to be shipped, product supplies, and partially completed products.

This is considered an Asset found on the balance sheet

Question 18

Define Accounts Payable?

What financial statement does it belong and what is it considered on a T-account?

Answer 18

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

Question 19

Define Debt?

What financial statement does it belong and what is it considered on a T-account?

Answer 19

Mostly considered bank loans

This is considered a liability found on the balance sheet.

Question 20

what are the financial statement linkages, describe them

Answer 20

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

Question 21

describe the difference between short term and long term assets

Answer 21

Short term assets are resources used quickly such as inventory

Long term assets are resources used over long periods of time such as equipment

Question 22

What is GAAP?
Why do we need it?
Who determines it?
What is GAAP based on?

Answer 22

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

Question 23

what are the three major business activites?

Answer 23

Operating, investing and financing

Question 24

What else does the balance sheet referred to as?

Answer 24

Statement of financial position or statement of financial condition at ONE point in time.

Question 25

Define Account

Answer 25

a record that summarizes the changes in the balances of assets, liabilities and stockholders equity.

Question 26

What is the difference between book value and market value.

Answer 26

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

Question 27

What is the equation for return on equity?

Answer 27

Return on equity = ( net income / average stockholders’ equity)

Question 28

What is the equation to debt to equity ratio?

Answer 28

Debt to equity ratio = (Total Liabilities / Total stockholders’ equity)

Question 29

Define Blockchain

Answer 29

a distributed digital ledger that provides a secure means for approved parties to view recorded transactions