Unit 2 and 3

Question 1

What is the balance sheet?

Answer 1

The balance sheet is a listing of the organization’s assets, liabilities, and stockholders’ equity at a point of time

Question 2

What are the assets?

Answer 2

Assets represent the amount of resources owned by the entity

Question 3

What are the liabilities?

Answer 3

Liabilities are amounts owed to other entities

Question 4

What is stockholders’ equity?

Answer 4

Equity is the ownership right of the owners of the entity in the assets that remain after deducting liabilities

Question 5

What are current assets?

Answer 5

Current assets are cash and other assets that are likely to be converted into cash or used to benefit the entity within one year (considering the financial year)

Question 6

What are current liabilities?

Answer 6

Current liabilities are those liabilities that are likely to be paid with cash within one year of the balance sheet date

Question 7

What are plant and equipment?

Answer 7

Plant and equipment includes long-term assets that will benefit the entity over several years

Question 8

What are long-term liabilities?

Answer 8

Long-term liabilities are those liabilities that will not be repaid within one year of the balance sheet date

Question 9

What is the income statement?

Answer 9

The Income statement shows the profit (or loss) for the period of time under consideration

Question 10

What are revenues?

Answer 10

Revenues result from the entity’s operating activities ( e.g. selling merchandise).

Question 11

What are cost and expenses?

Answer 11

Cost and expenses are incurred when generating revenues and operating the entity.

Question 12

What is a transaction?

Answer 12

Transactions are economic interchanges between entities that are accounted for and reflected in financial statements

Question 13

What is a proprietorship?

Answer 13

A proprietorship is an activity conducted by an individual

Question 14

What is a partnership?

Answer 14

The partnership is essentially a group of proprietors who have banded together

Question 15

What is a corporation?

Question 16

What is the fiscal year?

Answer 16

A firm’s fiscal year is the annual period used for reporting to owners,the government, and others. Many firms select the calendar year as their fiscal year, but other 12-month periods can also be selected.

Question 17

What is the statement of changes in Stockholder’s Equity?

Answer 17

It shows the details of stockholders’ equity and explains the changes that occurred in the components of stockholders’ equity during the year,thus it has a period of time orientation

Question 18

What is paid-in capital?

Answer 18

Paid-in capital represents the total amount invested in the entity by the owners (stockholders). When the stock issued to the owners has a par value there will usually be two categories of paid-in capital: common stock and additional paid-in capital.

Question 19

What is common stock?

Answer 19

When the common stock has a par value, the amount shown for common stock in the financial statements will be the par value multiplied by the number of shares issued.
If the common stock does not have a par value, the amount shown for common stock in the financial statements will be the total amount invested by the stockholders.

Question 20

What is additional paid-in capital?

Answer 20

Additional paid-in capital is the difference between the total amount invested by the stockholders and the par value or stated value of the stock.

Question 21

What is retained earnings?

Answer 21

Retained earnings is the second principal category of stockholders’ equity.
It represents the cumulative net income of the entity that has been retained for use in the business.
If “retained earnings” has a negative balance (because cumulative losses), this part of stockholders’ equity is referred to as deficit.

Question 22

What are dividends?

Answer 22

Dividends are distributions of earnings that have been made to the stockholders; so these dividends reduce retained earnings.

Question 23

What is the statement of cash flows?

Answer 23

The purpose of this financial statement is to identify the sources and uses of cash during the year.
Three activity categories are: operating activities, investing activities, and financing activities.
Items must be added to or subtracted from the net income to arrive at net increase in cash flows for the year.

Question 24

What does it means to say that there has been an accounting transaction between you and your school? Give an example of such a transaction

Question 25

What is the purpose of a transaction?

Question 26

What does it mean when a balance sheet has been prepared for an organization?

Question 27

What does it mean when a stockholder says that he needs to look at his firm’s set of four financial statements to fully understand its financial position and results of operations?

Question 28

What does it mean when a company that has a high net income doesn’t have enough cash to pay its bills? Discuss why investors must carefully consider cash flow information in conjunction with accrual accounting results.