Financial Statements

Question 1

Income Statement—Statement of Profit or Loss

Answer 1

Measures the performance of the firm for the period. It is dated for the entire period (e.g., for the year ended December 31, 20xX)

Question 2

What is included in the Income Statement?

Answer 2

Almost all revenues, expenses, gains, and losses are shown on the income statement and are included in the calculation of net income. A major exception here is prior period adjustments

Question 3

Statement of Comprehensive Income

Answer 3

Reports all non-owner changes in equity over a period of time—items on it are:

a. Unrealized gains and losses on available for sale securities
b. Adjustments in the calculation of pension liability
c. Foreign currency translation adjustments
d. Deferrals of certain gains or losses on hedge accounting

Question 4

What is included in the Statement of Comprehensive Income?

Answer 4

Net income (or loss) and the items not part of net income such as:
1. Unrealized gains and losses on available-for-sale securities
2 .Adjustments in the calculation of the pension liability
3. Foreign currency translation adjustments
4. Deferrals of certain gains or losses on hedge accounting

Question 5

Balance Sheet—Statement of Financial Position

Answer 5

Discloses the resources of the firm at a point in time. It is dated as of a specific date (e.g., December 31, 20xX).

Question 6

What is included in the Balance Sheet—Statement of Financial Position?

Answer 6

A business enterprise discloses its economic resources (assets) and the manner of financing the acquisition of those resources (creditors, owners’ contributions, and prior year’s earnings) in the balance sheet A=L+OE

Question 7

What are the two formats of a Balance Sheet?

Answer 7

Account format - the assets are shown on the left side of the page, and the liabilities and owners’ equity are shown on the right side
Report format - categories of accounts are listed from top to bottom

Question 8

Which accounts are classified on the Balance Sheet?

Answer 8

Assets, liabilities, and equities

Question 9

What’s the prescribed order of Assets?

Answer 9

In order of decreasing liquidity. The most liquid assets (such as cash) are shown first, and less liquid assets are shown last (such as property, plant, and equipment)

Question 10

What’s the prescribed order of Liabilities?

Answer 10

In order of maturity. Current liabilities are presented first and then long-term liabilities are presented

Question 11

What’s the prescribed order of Owners Equity?

Answer 11

(Also referred to as Shareholders’, Stockholders’, or Shareowners’ Equity) items are shown in order of permanence

Question 12

What are current assets?

Answer 12

Assets that are in the form of cash, or will be converted into cash, or consumed within one year or the operating cycle of the business

Question 13

What are types of current assets?

Answer 13

Cash, accounts receivable, short-term investments, inventory, and prepaid assets are current assets

Question 14

What are current liabilities?

Answer 14

Liabilities that are due in the upcoming year or in the operating cycle of the business; will be met through the transfer of a current asset or the creation of another current liability

Question 15

What are types of current liabilities?

Answer 15

Accounts payable, wages payable, income tax payable, unearned revenues, and warranty liability are current liabilities along with the current portion of long-term debt

Question 16

What are Long-term assets and long-term liabilities

Answer 16

These are defined by exclusion. All assets/liabilities that do not meet the criteria necessary to be classified as current are classified as long-term assets/liabilities

Question 17

What are types of Long-term assets?

Answer 17

Long-term investments, plant assets, certain deferred charges, and intangible assets are non-current assets

Question 18

What are types of Long-term liabilities?

Answer 18

Notes and bonds payable and mortgages payable are long-term liabilities

Question 19

Statement of Stockholders’ Equity

Answer 19

Presents the changes in the owners’ equity over a period of time—the same time period as the income statement

Question 20

What changes affect the Statement of Stockholders’ Equity?

Answer 20

Changes in contributed capital, additional paid-in capital, and retained earnings. These changes arise from the purchase and sale of shares of the entities stock, the changes in comprehensive income, and the payment of dividends

Question 21

Statement of Cash Flows

Answer 21

It describes the major changes in cash by meaningful category

Question 22

What’s the purpose of the Statement of Cash Flows?

Answer 22

To explain the change in cash and cash equivalents that has occurred during the past accounting year such as short-term investments that:
Are convertible into a known and fixed amount of cash; and have an original maturity to the purchaser of three months or less

Question 23

What are the three categories of Cash Flows?

Answer 23

Operating, Investing and Financing

Question 24

What is Operating?

Answer 24

Those cash flows related to transactions that flow through the income statement

Question 25

What items are included in Operating Cash Flows?

Answer 25

Cash inflows are receipts from customers and interest. Cash outflows are payments to suppliers, to employers, and to taxing authorities

Question 26

What is Investing?

Answer 26

Cash flows related to the acquisition and disposal of long-term assets and investments (other than cash equivalents and trading securities; these are operating)

Question 27

What items are included in Investing?

Answer 27

Cash outflows include purchases of plant assets and investments. Cash inflows include proceeds from the sale of these items

Question 28

What is Financing?

Answer 28

Cash flows related to the liabilities and owners’ equity sections of the balance sheet

Question 29

What items are included in Financing?

Answer 29

Cash inflows include issuing debt and equity securities. Cash outflows include retirement of debt and equity securities, and dividend payments