Module 1

Question 1

What is the accounting equation?

Answer 1

It is the basic tool of accounting measuring the resources of a business (assets) and the claims to these resources (what the business owes to its creditors and owners).

Question 2

What are assets?

Answer 2

Assets are economic resources that are expected to benefit the business in the future and that have a value.

Question 3

What are liabilities?

Answer 3

Liabilities are anything a business owes that has to be paid in the future. In other words, liabilities represent the creditor´s claims to the business´s assets.

Question 4

What is (owner´s) equity?

Answer 4

(Owner´s ) equity is the owner´s claim to the assets left over of a business after a business has paid all of its liabilities (net worth).

Question 5

What are revenues?

Answer 5

Revenues are earnings that result from delivering goods and services to customers.

Question 6

What are expenses?

Answer 6

Expenses are the costs of selling goods and services.

Question 7

What is owner´s capital?

Answer 7

owner´s contribution to a business that increase the owner´s equity. It can be either cash or other assets.

Question 8

What are owner´s withdrawals?

Answer 8

Payment of equity (normally cash but could also include other properties) to the owner.

Question 9

What is net income?

Answer 9

It occurs, when revenues > expenses and it increases owner´s equity.

Question 10

What is net loss?

Answer 10

It occurs, when revenues < expenses and it decreases owner´s equity.

Question 11

What are financial statements?

Answer 11

Financial statements are business documents used to deliver the informations needed to make business decisions.

Question 12

What are the 4 financial statements (meant for external users)?

Answer 12

The 4 financial statements are:

• Income Statement;
• Stockholder´s Equity;
• Balance Sheet;
• Statement of Cash Flows.

Question 13

What is the Income Statement?

Answer 13

The Income Statement reports either the net income or the net loss of a business in a specific period of time.

Question 14

What is the main question the income statement answers?

Answer 14

Is this business profitable?

Question 15

What is the Statement of Stockholder´s Equity?

Answer 15

The Statement of Stockholder´s Equity reports how the owner´s capital account has changed from the beginning to the end of the year.

Question 16

What is the main question the Statement of Stakeholder´s Equity answers?

Answer 16

How the business uses its earnings?

Question 17

What is the Balance Sheet Statement?

Answer 17

The balance sheet statement reports assets, liabilities and owner´s equity as of a specific date.

Question 18

What is the main question the Balance Sheet Statement answers?

Answer 18

What are the assets of a business and who has a claim over them?

Question 19

What is the Statement of Cash Flows?

Answer 19

The Statement of Cash Flows reports a business´s receipts and cash payments for a specific time period.

Question 20

What is the main question the Statement of Cash Flows answers?

Answer 20

Does the business generate enough cash to pay its bills?

Question 21

What are operating activities?

Answer 21

The operating activities are the daily processes conducted by a company to generate income

Question 22

What are investing activities?

Answer 22

Investing activities include the purchase and sale of land and equipment for cash.

Question 23

What are financing activities?

Answer 23

Financing activities include cash contributions by the owner and owner´s withdrawals of cash.

Question 24

With what must the ending cash balance in the statement of cash flows match?

Answer 24

The ending cash balance in the statement of cash flows must match the cash balance on the balance sheet.