Topic 2: Overview of the Financial Statements

Question 1

Accounting Equation

Answer 1

Assets=Liabilities + Owners Equity

Question 2

Assets

Answer 2

Firms economic resources; probable future economic benefits obtained or controlled by a particular entity as a result of transactions or events.

Question 3

Balance Sheet

Answer 3

Statement of financial position; shows financial resources the company owns or controls and the claims on those resources.

Question 4

Book value

Answer 4

Assets cost minus assets accumulated depreciation.

Question 5

Comparability

Answer 5

Information that’s more useful when it can be related to a benchmark or standard.

Question 6

Conservatism

Answer 6

Persuasive factor in accounting;
when in doubt, recognize all losses but don’t recognize any gains

Question 7

Consistency

Answer 7

Once you adopt an accounting principle, continue to follow it in future accounting periods.

Question 8

Earnings Per Share (EPS)

Answer 8

Tells the owner of one share of stock what they really want to know.

Question 9

Entity Concept

Answer 9

The idea that personal financial activity is kept separate from business financial activity.

Question 10

Expenses

Answer 10

Amount of assets consumed from the performance of business operations and thus are the opposite of revenue.

Question 11

External audit

Answer 11

Audit conducted by external (independent) qualified accountants

Question 12

Financing activities

Answer 12

Where cash is obtained, or repaid to, owners and creditors

Question 13

Gains

Answer 13

Money made in activities outside the normal business of the company

Question 14

Going concern assumption

Answer 14

Allows readers of financial statements to assume that the company will continue on long enough for to carry out objectives and commitments

Question 15

Historical cost convention

Answer 15

Values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition

Question 16

Income Statement

Answer 16

A company’s financial performance for a specified period of time.

Question 17

Investing Activities

Answer 17

Purchase & sale of land, buildings, and equipment. Also include buying and selling stocks of other companies

Question 18

Liabilities

Answer 18

Future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events.

Question 19

Liquidity

Answer 19

The ease with which the item can be turned into cash

Question 20

Losses

Answer 20

Money lost on activities outside of the normal business of a company.

Question 21

Materiality

Answer 21

The question of whether an item is large enough to make any difference to anyone.

Question 22

Net Assets

Answer 22

Total assets minus total liabilities

Question 23

Net income

Answer 23

The difference between revenue and expenses; positive

If revenue exceeds expenses= net income; if expenses exceeds revenue= net loss

Question 24

Net Loss

Answer 24

Difference between revenue and expenses; negative

Question 25

Notes to Financial Statements

Answer 25

Provide additional information pertaining to a company’s operations and financial position.

Question 26

Operating activities

Answer 26

Producing and selling goods and services and thus compromise on the day to day business of a company.

Question 27

Owners equity

Answer 27

Portion of the assets that the owners of the organization can really call their own.

Question 28

Paid-in Capital

Answer 28

The value of the assets given in exchange for shares of stock.

Question 29

Relevance

Answer 29

Qualitative characteristic; information that is timely, useful, has predictive value, and is going to make a difference to a decision maker.

Question 30

Reliability

Answer 30

Qualitative characteristic; information is verifiable, objective (not subjective) and you can depend on it.

Question 31

Retained Earnings

Answer 31

Represent the portion of stockholders equity that has not been paid to the owners as dividends

Question 32

Revenue

Answer 32

The amount of assets created through the performance of business operations.

Question 33

Statement of Cash Flows

Answer 33

Individual cash flow items that are classified according to three main activities:
1. Operating
2. Investing
3. Financing

Question 34

Stockholders equity

Answer 34

Capital received from investors in exchange for stock (paid-in capital), donated capital and retained earnings

Question 35

Time Period Concept

Answer 35

Business should report the financial results of its activities over a standard time period, which is usually monthly, quarterly, or annually

Question 36

Treasury Stock

Answer 36

Shows as a subtraction in the stockholders equity section of the balance sheet