The purpose and use of financial statements

Question 1

What is the meaning of Accounting?

Answer 1

The information system that identifies, records, and communicates the economic events of an organization to users interested in that information.

Question 2

Assets equation:

Answer 2

Assets = Liabilities + Shareholders’ Equity.

Question 3

Assets

Answer 3

The resources owned or controlled by a business that are expected to provide future economic benefits.

Question 4

Corporation

Answer 4

A company organized as a separate legal entity, with most of the rights and privileges of a person. Shares are evidence of ownership.

Question 5

Creditors

Answer 5

Users of accounting information, including suppliers, that grant credit (sell on account) to a customer.

Question 6

Deficit

Answer 6

A negative balance in retained earnings resulting from cumulative net losses exceeding cumulative net income.

Question 7

Dividends

Answer 7

The distribution of retained earnings from a corporation to its shareholders, often in the form of cash.

Question 8

Expenses

Answer 8

The decreases in economic benefits that result from the costs of assets consumed or services used in ongoing operations to generate revenue.

Question 9

External users

Answer 9

Users of accounting information that are not involved in managing the organization and do not have access to accounting information other than that which is publicly available, including investors, lenders, and other creditors.

Question 10

Financing activities

Answer 10

Activities that report the cash effects of debt or equity financing. These include (1) borrowing or repaying cash from (to) lenders, and (2) issuing or reacquiring shares or paying dividends to investors.

Question 11

Fiscal year

Answer 11

An accounting period that is one year long.

Question 12

Generally accepted accounting principles (GAAP)

Answer 12

A general guide, having substantial authoritative support, that describes how economic events should be recorded and reported for financial reporting purposes.

Question 13

Income/Revenue

Answer 13

The increase in economic benefits that result from the normal operating activities of a business, such as the sale of a product or provision of a service.

Question 14

Income statement

Answer 14

A financial statement that presents the revenues and expenses and resulting net income or loss of a company for a specific period of time.

Question 15

Internal users

Answer 15

Users of accounting information who have access to an organization’s internal accounting information, including company officers, managers, and directors.

Question 16

Investing activities

Answer 16

Activities that report the cash effects of purchasing and disposing of long-lived assets such as property, plant, and equipment and investments not held for trading.

Question 17

Investors

Answer 17

Users of accounting information that have an ownership interest (owns debt or equity securities) in the organization.

Question 18

Lenders

Answer 18

Users of accounting information, including bankers, that extend credit to borrowers.

Question 19

Liabilities

Answer 19

The debts and obligations of a business. Liabilities are claims of lenders and other creditors on the assets of a business.

Question 20

Net Loss

Answer 20

The amount by which expenses are more than revenues. The opposite of net income.

Question 21

Net income

Answer 21

The amount by which revenues exceed expenses.

Question 22

Operating activities

Answer 22

Activities that result from day-to-day operations. They report the cash effects of transactions that create revenues and expenses.

Question 23

Partnership

Answer 23

A business owned by more than one person.

Question 24

Private corporation

Answer 24

A corporation whose shares are not traded on a public stock exchange.

Question 25

Proprietorship

Answer 25

A business owned by one person.

Question 26

Public corporation

Answer 26

A corporation whose shares are publicly traded on a stock exchange.

Question 27

Reporting entity concept

Answer 27

The concept that economic activity that can be identified with a particular company must be kept separate and distinct from the activities of the owner(s) and of all other economic entities.

Question 28

Retained earnings

Answer 28

The amount of accumulated net income from the prior and current periods that has been retained and reinvested in the corporation for future use and not distributed to shareholders as dividends.

Question 29

Income

Answer 29

The increase in economic benefits that result from the operating activities of a business, such as the sale of a product or provision of a service.

Question 30

Share capital

Answer 30

Shares representing the ownership interest in a corporation. If only one class of shares exists, it is known as common shares.

Question 31

Shareholders’ equity

Answer 31

The shareholders’ claim on total assets, represented by the investments of the shareholders (share capital) and undistributed earnings (retained earnings) generated by the company.

Question 32

Statement of cash flows

Answer 32

A financial statement that provides information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time.

Question 33

Statement of changes in equity

Answer 33

A financial statement that summarizes the changes in total shareholders’ equity, as well as each component of shareholders’ equity, for a specific period of time.

Question 34

Statement of financial position

Answer 34

A financial statement that reports the assets, liabilities, and shareholders’ equity at a specific date.