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Accounting Assistant > Financial Statements > Flashcards

Financial Statements Flashcards

1
Q

What are the five financial statements that a U.S. corporation must include in its annual financial statements?

A
  • Income statement
  • Statement of comprehensive income
  • Balance sheet
  • Statement of stockholders’ equity
  • Statement of cash flows
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2
Q

What must accompany the financial statements to disclose important information?

A

Notes to the financial statements

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3
Q

What accounting principles must U.S. corporations comply with when issuing financial statements?

A

Generally accepted accounting principles (GAAP or US GAAP)

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4
Q

True or False: The amounts in financial statements are always relevant for future decisions.

A

False

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5
Q

Where do the amounts reported on financial statements originate from?

A

Business transactions recorded in the general ledger accounts

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6
Q

What are adjusting entries necessary for?

A
  • Recording amounts that pertain to more than one accounting period
  • Including expenses incurred late in an accounting period
  • Complying with US GAAP requirements
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7
Q

What accounting method is required for most corporations, and what does it entail?

A

Accrual method of accounting; it reports sales and expenses when they occur rather than when cash is received or paid.

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8
Q

What is the benefit of using the accrual method of accounting?

A
  • 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
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9
Q

What are interim financial statements?

A

Financial statements issued between annual financial statements, typically prepared monthly or quarterly.

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10
Q

What is the difference between a calendar year and a fiscal year?

A
  • Calendar year: January 1 to December 31
  • Fiscal year: Any 12-month period that does not coincide with the calendar year
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11
Q

Who are the typical users of financial statements?

A
  • Current stockholders
  • Current lenders
  • Financial analysts
  • Potential investors
  • Government agencies
  • Labor unions
  • Competitors
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12
Q

What does US GAAP include?

A
  • Historical cost principle
  • Revenue recognition
  • Going concern
  • Full disclosure
  • Industry practices
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13
Q

What are the alternative names for the income statement?

A
  • Statement of income
  • Statement of earnings
  • Statement of operations
  • Profit and loss statement
  • P&L
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14
Q

What is gross profit defined as?

A

Net sales minus cost of goods sold

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15
Q

How is net income calculated?

A

Total revenues minus total expenses, gains, and losses

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16
Q

What impact does net income have on retained earnings?

A

Positive net income increases retained earnings; negative net income decreases retained earnings.

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17
Q

What is Earnings Per Share (EPS)?

A

Net income divided by the weighted-average number of common shares outstanding during the accounting period.

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18
Q

Fill in the blank: The historical cost principle indicates that most amounts on the income statement reflect a corporation’s _______.

A

actual transactions

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19
Q

What is included in the statement of comprehensive income?

A
  • Net income
  • Other comprehensive income
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20
Q

What is the purpose of the notes to the financial statements?

A

To provide important information about amounts appearing or not appearing on the financial statements.

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21
Q

What is the purpose of the statement of comprehensive income?

A

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.

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22
Q

What are the components of comprehensive income?

A
  • Net income
  • Other comprehensive income

Other comprehensive income includes unrealized gains or losses on derivatives, pension liabilities, and foreign currency translation adjustments.

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23
Q

Where are adjustments for other comprehensive income reported?

A

On the statement of comprehensive income and included in accumulated other comprehensive income

This accumulation is part of stockholders’ equity.

24
Q

What does the balance sheet report?

A

A corporation’s assets, liabilities, and stockholders’ equity as of a specific point in time

25
Q

What is the accounting equation represented in the balance sheet?

A

Assets = Liabilities + Stockholders’ Equity

26
Q

What is working capital?

A

Current assets minus current liabilities

27
Q

What is the formula for the current ratio?

A

Current assets divided by current liabilities

28
Q

What are examples of current assets?

A
  • Cash
  • Accounts receivable
  • Inventory
  • Prepaid expenses
29
Q

What are examples of current liabilities?

A
  • Accounts payable
  • Wages payable
  • Customer deposits
  • Income taxes payable
30
Q

What is stockholders’ equity?

A

A corporation’s assets minus its liabilities

31
Q

What are the major components of stockholders’ equity?

A
  • Paid-in capital
  • Retained earnings
  • Accumulated other comprehensive income
  • Treasury stock
32
Q

What does the statement of stockholders’ equity report?

A

The components of stockholders’ equity, their balances, and the changes during an accounting year

33
Q

What does the statement of cash flows (SCF) report?

A

A corporation’s significant cash inflows and outflows during an accounting period

34
Q

What are the major sections of the statement of cash flows?

A
  • Operating activities
  • Investing activities
  • Financing activities
35
Q

What are cash flows from operating activities?

A

Cash inflows and outflows from the core business operations

36
Q

What are cash flows from investing activities?

A

Cash outflows for acquiring noncurrent assets and inflows from selling them

37
Q

What are cash flows from financing activities?

A

Cash received from borrowing or issuing securities and cash outflows for repaying debt

38
Q

Fill in the blank: The balance sheet is also known as the _______.

A

[statement of financial position]

39
Q

True or False: Stockholders’ equity indicates a corporation’s current market value.

A

False

40
Q

What does accumulated other comprehensive income include?

A

Adjustments from other comprehensive income not included in net income

41
Q

What is cash balance?

A

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.

42
Q

What does the cash flows from financing activities section report?

A

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.

43
Q

What is the effect of cash dividends on a corporation’s cash balance?

A

Unfavorable; cash dividends reduce the corporation’s cash balance

Example: $10,000 in cash dividends is shown as a negative amount.

44
Q

What is the net cash provided by financing activities in the example?

A

$28,000

This is calculated from cash inflows and outflows related to financing activities.

45
Q

What does the Statement of Cash Flows include?

A

Operating, investing, and financing activities

Each section reflects different aspects of cash flow.

46
Q

What is free cash flow?

A

Cash from operating activities minus cash required for capital expenditures

Some analysts also subtract cash dividends if considered necessary.

47
Q

How is free cash flow calculated using ABC Corporation’s data?

A

Net cash provided from operating activities ($126,000) minus capital expenditures ($95,000)

Resulting in $31,000 free cash flow.

48
Q

What do notes to financial statements provide?

A

Additional information beyond the financial statements’ amounts and line descriptions

They are required by the full disclosure principle.

49
Q

What topics are typically covered in the notes to financial statements?

A
  • Nature of business
  • Investments
  • Employee benefit plans
  • Revenue recognition
  • Long-term debt

This list is not exhaustive and varies by corporation.

50
Q

What are consolidated financial statements?

A

Financial statements that report the results of a parent corporation and its subsidiaries

They reflect the entire economic entity’s financial position.

51
Q

What is a comparative financial statement?

A

A financial statement that reports amounts for the current year and one or two additional years

This allows for easier year-over-year comparisons.

52
Q

What is the role of independent certified public accountants in audited financial statements?

A

To provide assurance that financial statements present fairly the corporation’s financial position

Required for publicly traded corporations.

53
Q

What is Form 10-K?

A

An Annual Report to the SEC that includes audited, comparative financial statements

Required for publicly-traded corporations.

54
Q

What additional information is included in Form 10-K?

A
  • 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.

55
Q

What are interim financial statements?

A

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).

56
Q

True or False: Notes to financial statements are optional.

A

False

Notes are required for full disclosure in financial reporting.

Accounting Assistant (14 decks)

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