Financial Statements Flashcards
What are the five financial statements that a U.S. corporation must include in its annual financial statements?
- Income statement
- Statement of comprehensive income
- Balance sheet
- Statement of stockholders’ equity
- Statement of cash flows
What must accompany the financial statements to disclose important information?
Notes to the financial statements
What accounting principles must U.S. corporations comply with when issuing financial statements?
Generally accepted accounting principles (GAAP or US GAAP)
True or False: The amounts in financial statements are always relevant for future decisions.
False
Where do the amounts reported on financial statements originate from?
Business transactions recorded in the general ledger accounts
What are adjusting entries necessary for?
- Recording amounts that pertain to more than one accounting period
- Including expenses incurred late in an accounting period
- Complying with US GAAP requirements
What accounting method is required for most corporations, and what does it entail?
Accrual method of accounting; it reports sales and expenses when they occur rather than when cash is received or paid.
What is the benefit of using the accrual method of accounting?
- All revenues earned during the accounting period are included
- All expenses incurred during the accounting period are included
- All assets and liabilities as of the end of the accounting period are included
What are interim financial statements?
Financial statements issued between annual financial statements, typically prepared monthly or quarterly.
What is the difference between a calendar year and a fiscal year?
- Calendar year: January 1 to December 31
- Fiscal year: Any 12-month period that does not coincide with the calendar year
Who are the typical users of financial statements?
- Current stockholders
- Current lenders
- Financial analysts
- Potential investors
- Government agencies
- Labor unions
- Competitors
What does US GAAP include?
- Historical cost principle
- Revenue recognition
- Going concern
- Full disclosure
- Industry practices
What are the alternative names for the income statement?
- Statement of income
- Statement of earnings
- Statement of operations
- Profit and loss statement
- P&L
What is gross profit defined as?
Net sales minus cost of goods sold
How is net income calculated?
Total revenues minus total expenses, gains, and losses
What impact does net income have on retained earnings?
Positive net income increases retained earnings; negative net income decreases retained earnings.
What is Earnings Per Share (EPS)?
Net income divided by the weighted-average number of common shares outstanding during the accounting period.
Fill in the blank: The historical cost principle indicates that most amounts on the income statement reflect a corporation’s _______.
actual transactions
What is included in the statement of comprehensive income?
- Net income
- Other comprehensive income
What is the purpose of the notes to the financial statements?
To provide important information about amounts appearing or not appearing on the financial statements.
What is the purpose of the statement of comprehensive income?
To present a corporation’s net income and other comprehensive income
Other comprehensive income includes unrealized gains or losses on derivatives, pension liabilities, and foreign currency translation adjustments.
What are the components of comprehensive income?
- Net income
- Other comprehensive income
Other comprehensive income includes unrealized gains or losses on derivatives, pension liabilities, and foreign currency translation adjustments.
Where are adjustments for other comprehensive income reported?
On the statement of comprehensive income and included in accumulated other comprehensive income
This accumulation is part of stockholders’ equity.
What does the balance sheet report?
A corporation’s assets, liabilities, and stockholders’ equity as of a specific point in time
What is the accounting equation represented in the balance sheet?
Assets = Liabilities + Stockholders’ Equity
What is working capital?
Current assets minus current liabilities
What is the formula for the current ratio?
Current assets divided by current liabilities
What are examples of current assets?
- Cash
- Accounts receivable
- Inventory
- Prepaid expenses
What are examples of current liabilities?
- Accounts payable
- Wages payable
- Customer deposits
- Income taxes payable
What is stockholders’ equity?
A corporation’s assets minus its liabilities
What are the major components of stockholders’ equity?
- Paid-in capital
- Retained earnings
- Accumulated other comprehensive income
- Treasury stock
What does the statement of stockholders’ equity report?
The components of stockholders’ equity, their balances, and the changes during an accounting year
What does the statement of cash flows (SCF) report?
A corporation’s significant cash inflows and outflows during an accounting period
What are the major sections of the statement of cash flows?
- Operating activities
- Investing activities
- Financing activities
What are cash flows from operating activities?
Cash inflows and outflows from the core business operations
What are cash flows from investing activities?
Cash outflows for acquiring noncurrent assets and inflows from selling them
What are cash flows from financing activities?
Cash received from borrowing or issuing securities and cash outflows for repaying debt
Fill in the blank: The balance sheet is also known as the _______.
[statement of financial position]
True or False: Stockholders’ equity indicates a corporation’s current market value.
False
What does accumulated other comprehensive income include?
Adjustments from other comprehensive income not included in net income
What is cash balance?
The amount of cash a corporation has available, which can be positively affected by money received from various activities
A positive cash balance indicates favorable financial health for the corporation.
What does the cash flows from financing activities section report?
Cash received from borrowing money or issuing securities, which is reported as positive amounts
Cash outflows for debt repayment, stock retirement, and dividends are reported as negative amounts.
What is the effect of cash dividends on a corporation’s cash balance?
Unfavorable; cash dividends reduce the corporation’s cash balance
Example: $10,000 in cash dividends is shown as a negative amount.
What is the net cash provided by financing activities in the example?
$28,000
This is calculated from cash inflows and outflows related to financing activities.
What does the Statement of Cash Flows include?
Operating, investing, and financing activities
Each section reflects different aspects of cash flow.
What is free cash flow?
Cash from operating activities minus cash required for capital expenditures
Some analysts also subtract cash dividends if considered necessary.
How is free cash flow calculated using ABC Corporation’s data?
Net cash provided from operating activities ($126,000) minus capital expenditures ($95,000)
Resulting in $31,000 free cash flow.
What do notes to financial statements provide?
Additional information beyond the financial statements’ amounts and line descriptions
They are required by the full disclosure principle.
What topics are typically covered in the notes to financial statements?
- Nature of business
- Investments
- Employee benefit plans
- Revenue recognition
- Long-term debt
This list is not exhaustive and varies by corporation.
What are consolidated financial statements?
Financial statements that report the results of a parent corporation and its subsidiaries
They reflect the entire economic entity’s financial position.
What is a comparative financial statement?
A financial statement that reports amounts for the current year and one or two additional years
This allows for easier year-over-year comparisons.
What is the role of independent certified public accountants in audited financial statements?
To provide assurance that financial statements present fairly the corporation’s financial position
Required for publicly traded corporations.
What is Form 10-K?
An Annual Report to the SEC that includes audited, comparative financial statements
Required for publicly-traded corporations.
What additional information is included in Form 10-K?
- Management’s Discussion and Analysis
- Certification by management on internal controls
- Disclosures of risk and legal proceedings
These components provide further context on the corporation’s financial health.
What are interim financial statements?
Quarterly consolidated financial statements that are more condensed and reviewed by CPAs
They are part of the corporation’s Quarterly Report to the SEC (Form 10-Q).
True or False: Notes to financial statements are optional.
False
Notes are required for full disclosure in financial reporting.
