module 2

Question 1

The Balance Sheet

Answer 1

The balance sheet is divided into three sections.
▪ Assets
▪ Liabilities
▪ Stockholders’ equity
▪ It reports the assets, liabilities, and equity at a
point in time.
▪ Balance sheet accounts are called permanent
accounts in that they carry over from period to
period.

Question 2

When a cost creates an immediate benefit,…

Answer 2

we record the cost in the income statement as an expense.

Question 3

When a cost creates a future economic benefit,

Answer 3

we record it on the balance sheet as an asset.

Question 4

When an asset is used up, the asset’s cost is transferred

from the balance sheet to the

Answer 4

income statement, where it is recognized as an expense.

Question 5

An asset must possess two characteristics to be

reported on the balance sheet

Answer 5

1. It must be owned (or controlled) by the company.
2. It must confer expected future economic benefits
   that result from a past transaction or event

Question 6

Cash-CA

Answer 6

currency, bank deposits, and investments with an
original maturity of 90 days or less (called cash
equivalents).

Question 7

Short Term investment-CA

Answer 7

—marketable securities and
other investments the company expects to dispose of in
the short run.

Question 8

accounts recievable- CA

Answer 8

—amounts due to the company
from customers arising from the sale of products and
services on credit (“net” refers to the subtraction of
uncollectible accounts).

Question 9

inventories - CA

Answer 9

goods purchased or produced for sale to

customers

Question 10

prepaid expenses - CA

Answer 10

costs paid in advance for rent,

insurance, advertising, and other services

Question 11

Property, plant, and equipment (PPE), net- LA

Answer 11

land, buildings, and equipment (“net” refers to

the subtraction of accumulated depreciation).

Question 12

long term investments- LA

Answer 12

—investments the
company does not intend to sell in the near
future.

Question 13

intangible and other assets- LA

Answer 13

assets without
physical substance (such patents, trademarks,
franchise rights, and goodwill).

Question 14

historical costs

Answer 14

original acquisition costs, and not at

their current market values.

Question 15

liabilities are

Answer 15

are future economic sacrifices

Question 16

a liability has two characteristics

Answer 16

1. It is an unavoidable obligation for the company

2. It must arise from a past transaction or event

Question 17

A liability represents an amount that must be repaid

and can be:

Answer 17

1. Interest bearing – as in a bank loan

2. Non-interest bearing – as to a vendor or partner

Question 18

accounts payable- CL

Answer 18

—amounts owed to suppliers for goods

and services purchased on credit

Question 19

accrued liabilities (expenses)- CL

Answer 19

obligations for expenses that have
been incurred but not yet paid (such as wages earned by
employees but not yet paid)

Question 20

unearned revenues - CL

Answer 20

cash received from a customer in

advance for goods or services to be delivered later

Question 21

short term debt-CL

Answer 21

—short-term loans owing to banks or

other lenders

Question 22

Current maturities of long-term debt—CL

Answer 22

—principal portion of

long-term debt that is due to be paid within one year

Question 23

net working capital =

Answer 23

= current assets - current liabilties

Question 24

cash operating cycle

Answer 24

1. buy product (acct payable)
2. sell product (havent gotten money- acct recievable)
3. get cash

Question 25

long term debt- LL

Answer 25

—amounts borrowed from
creditors that are scheduled to be repaid more
than one year in the future.

Question 26

Other long-term liabilities-LL

Answer 26

—like pension liabilities and long-term tax liabilities, that will
be settled a year or more into the future

Question 27

Stockholders Equity

Answer 27

represents capital that has been invested by the stockholders, either
▪ Directly via the purchase of stock, or
▪ Indirectly in the form of retained earnings that
reflect earnings that are reinvested in the business
and not paid out as dividends.

Question 28

common stock

Answer 28

—par value received from the original

sale of common stock to investors

Question 29

additional paid in capital

Answer 29

amounts received from the original sale of stock to investors in excess of the par value of stock

Question 30

preferred stock

Answer 30

—value received from the original sale of preferred stock to investors

Question 31

treasury stock

Answer 31

—amount the company paid to
reacquire its common stock from shareholders.
Treasury shares are “held” by the company for
potential resale on the open market

Question 32

retained earnings

Answer 32

—cumulative net income that has
not been distributed to stockholders via dividends or
share repurchases

Question 33

book value

Answer 33

“value” of the company determined by

generally accepted accounting principles

Question 34

market value

Answer 34

is computed by multiplying the number of

outstanding common shares by the company’s stock price

Question 35

income statement

Answer 35

The income statement reports
▪ Revenues earned during a period
▪ Expenses incurred to produce those revenues
▪ Net income or loss (Revenue – Expenses)

Question 36

accruel accounting

Answer 36

Revenues and expenses recognized on the
income statement are NOT determined by the
cash received or paid

Question 37

Two principles are the foundation of accrual

accounting

Answer 37

1. Revenue recognition principle-—recognize
   revenues for goods and services provided to
   customers at an amount expected to be received.
2. Expense recognition principle–recognize expenses when incurred.

Question 38

revenue recognition principe

Answer 38

Recognize revenue when a performance obligation is
satisfied by transferring to a customer a promised good
or service
▪ Good or service is transferred when the customer
obtains control of that good or service

Question 39

discontinued operation has two components

Answer 39

1. The net income (loss) from the segment’s business
   activities prior to sale, and
2. Any gain or loss on the actual sale of the business.

Question 40

gross profit margin =

Answer 40

(Gross profit/Sales)
▪ The gross profit margin is influenced by both the
selling price of the company’s products and the cost
to make or buy those products

Question 41

margins for operating expenses

Answer 41

(Operating
expense/Sales)
▪ Analysis of operating expenses focuses on each
expense category reported by the company as a
percentage of sales over time and compared with
peer companies.

Question 42

Common stock and additional paid-in capital increase

Answer 42

by the proceeds from the sale of stock.

Question 43

Retained earnings increase by the

Answer 43

net income reported
in the income statement and decrease by the dividends
to shareholders

Question 44

Accumulated other comprehensive income increases

and decreases by

Answer 44

changes in asset and liability fair values that are not reported in the income statement.

Question 45

the statment of cash flows provide..

Answer 45

information about the company’s ability to

generate cash from those same transactions.

Question 46

cash flows from operating activities

Answer 46

Cash flows from the company’s transactions and

events that relate to its operations.

Question 47

cash flows from investing activities

Answer 47

Cash flows from acquisitions and divestitures of

investments and long-term assets

Question 48

cash flows from financing activities

Answer 48

Cash flows from issuances of and payments toward

borrowings and equity.