Quiz 1 Flashcards
What is accounting, and why is it called the “language of business”?
Accounting is the process of recording, summarizing, and reporting financial transactions of a business. It is called the “language of business” because it communicates financial information to stakeholders like managers, investors, and regulators, enabling them to make informed decisions.
What is net income, and how is it calculated?
Net income is the profit a company earns after all revenues and expenses are accounted for. It is calculated using the formula:
Net Income = Revenues - Expenses
It reflects the overall profitability of a company during a specific period.
What are retained earnings, and how is the retained earnings balance calculated?
Retained earnings represent the cumulative amount of net income that a company has retained (not distributed as dividends).
Retained Earnings Balance = Beginning Retained Earnings + Net Income - Dividends Paid
What are assets?
Assets are resources owned by a business that provide future economic benefits, such as cash, inventory, equipment, and real estate.
What are liabilities?
Liabilities are obligations or debts a company owes to outside parties, such as loans, accounts payable, and mortgages.
What is stockholders’ equity?
What does it include?
Stockholders’ equity represents the owners’ claims on the company’s assets after all liabilities have been paid. It includes common stock and retained earnings.
What is the purpose of the balance sheet?
What does it have on it?
The balance sheet provides a snapshot of a company’s financial position at a specific point in time by listing its assets, liabilities, and stockholders’ equity.
What is the purpose of the income statement?
The income statement shows a company’s financial performance over a period by summarizing revenues, expenses, and resulting net income or loss.
What is the purpose of the statement of retained earnings?
The statement of retained earnings explains changes in a company’s retained earnings over a period, detailing how net income and dividends affect the overall balance.
What is the accounting equation?
The accounting equation is the foundation of double-entry accounting:
Assets = Liabilities + Stockholders’ Equity
This equation ensures that a company’s balance sheet is balanced.
What are the key accounts in the balance sheet that you should know at an introductory level?
Assets: Cash, Accounts Receivable, Inventory, Property, Plant & Equipment.
Liabilities: Accounts Payable, Notes Payable, Accrued Expenses, Long-Term Debt.
Stockholders’ Equity: Common Stock, Retained Earnings.
: What are the key accounts in the income statement that you should know at an introductory level?
Key income statement accounts include:
Revenues: Sales Revenue, Service Revenue.
Expenses: Cost of Goods Sold (COGS), Rent Expense, Wages Expense, Utilities Expense.
Net Income: Revenues minus Expenses.
: What are the debit and credit rules for assets?
Assets increase with a debit and decrease with a credit.
What are the debit and credit rules for liabilities?
Liabilities increase with a credit and decrease with a debit.
What are the debit and credit rules for stockholders’ equity?
Stockholders’ equity increases with a credit and decreases with a debit.
