Unit 2 - Financial Statements Flashcards
What is the primary function of a financial statement?
To keep track of accounting information and prepare various reports from that information
List the components of annual reports.
- Financial Statements
- Balance Sheet
- Profit and Loss Account (Income Statement)
- Cash Flow Statement
- Statement of Change in Equity
- Explanatory Notes
What does a balance sheet show?
The financial position of a business on a specific date
What is the accounting equation detailed in a balance sheet?
Assets = Liabilities + Owner’s Equity
What must the total value of business assets equal?
The total value of the liabilities and capital of the business
How often must a balance sheet be prepared?
At least once a year
What are current assets?
Cash and other assets expected to be converted to cash, used up, or sold within one year or less
Define investments in the context of a balance sheet.
Short or long-term assets depending on the nature of the investments
What does property, plant, and equipment refer to?
Long-term assets used in the continuing operations of the business
What are intangible assets?
Long-term assets like patents, copyrights, and goodwill
What are current liabilities?
Obligations to be settled within one year
List examples of current liabilities.
- Accounts Payable
- Taxes Payable
- Salaries Payable
- Notes Payable
What are long-term liabilities?
Obligations usually payable in more than a year
What happens to a long-term liability in the year it becomes payable?
It is usually converted to a current liability
What does the income statement disclose?
The revenues generated and the expenses charged against these revenues for the accounting period
When is net income called profits?
When revenues exceed expenses
When is net income called losses?
When expenses exceed revenues
What are costs of goods sold?
The cost of the goods sold to customers
What does depreciation represent?
The expense of using company-owned buildings, equipment, and furniture
What does the statement of change in equity show?
Changes in the proprietor’s capital over a period of time
What does the cash flow statement disclose?
Changes made in cash during a period, including inflows and outflows of cash and cash equivalents
What do explanatory notes provide?
Basis of preparation of financial statements, significant accounting policies, and additional useful information
Fill in the blank: The total liabilities and equity must equal __________.
Total Assets
True or False: Financial statements are prepared from information obtained from business transactions.
True
