Overview

Question 1

Balance Sheet equation

Answer 1

Assets = Liabilities + Equity

Question 2

Income Statement equation

Answer 2

Net Income = Revenue - Expenses

Question 3

Statement of Cashflows equation

Answer 3

Net Cash Flow = Cash Inflow - Cash Outflow

Question 4

Which is the only statement which reflects a snapshot in time? (As opposed to an accounting period.)

Answer 4

The balance sheet

Question 5

Which statement reports the entity’s financial position?

Answer 5

The balance sheet

Question 6

Which statement measures earning ability?

Answer 6

The income statement

Question 7

What are the elements of Equity? (As in the balance sheet.)

Answer 7

Retained Earnings + Common Stock + Additional Paid-In Capital

(“Contributed Capital” = Common Stock + APC)

Question 8

What are the three primary categories for which cash flow is measured?

Answer 8

Operations, investments, and financing

Question 9

What does GAAP stand for and what does it do?

Answer 9

Generally Accepted Accounting Principles. They are the rules which standardize American accounting practices.

Question 10

What is the FASB and what does it do?

Answer 10

The Financial Accounting Standards Board drafts the GAAP.

Question 11

What are Retained Earnings and how are they calculated?

Answer 11

Retained earnings are profits that are reinvested in the company rather than being distributed as dividends.

Ending Retained Earnings = Net Income + Beginning Retained Earnings

Question 12

What primary insight(s) can be gleaned from the Statement of Cash Flows?

Answer 12

Primary performance indicator
Entity's ability to meet its operational cash needs (short-term)
Entity's ability to repay creditors
Entity's ability to expand
Entity's ability to distribute dividends

Question 13

What primary insight(s) can be gleaned from the Balance Sheet?

Answer 13

The entity’s financial position

Question 14

What primary insight(s) can be gleaned from the Statement of Shareholders’ Equity?

Answer 14

Whether the company is reinvesting sufficiently to support future growth.

A secondary indicator of financial position.

Question 15

What are external users of financial accounting reports primarily interested in?

Answer 15

The amounts, timing, and degree of certainty of future cash flows.

Question 16

What are the four basic assumptions in accounting?

Answer 16

The Separate Entity Assumption: Each business’ activities are accounted for separately from the activities of all other entities.

The Going Concern Assumption: The entity will be operative long enough to satisfy its contractual obligations.

The Monetary Unit Assumption: Figures are reported in the national monetary unit of the entity’s base country without any adjustment for changes in purchasing power.

The Historical Cost Assumption: Figures are reported at the cash-equivalent value of the date of the transaction.