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INTRO FIN ACCOUNTING
CHAPTERs 1-4
| Term | Definition |
|---|---|
| Organizations undertake planning activities | -Financing -Investing -Operating |
| Financing | means used to pay for resources |
| Investing | buying and selling of resources necessary to carry out org plans |
| Operating | the actual carrying out of plans for organizations |
| Organization's financial activities | liabilities+ equity= sources of funds |
| Pay for investing activities | assets= use of funds |
| accounting equation | assets=liabilities + equity |
| 4 main financial statements | -income statement -balance sheet -statement of stockholder's equity -statement of cash flow |
| Income Statement | provides information relating to a company's revenues, expenses, and profitability over time |
| Balance Sheet | list of assets, liabilities, and stockholders' equity |
| Statement of Stockholder's Equity | reports on the changes to each stockholders' equity act during the year |
| Statement of Cash Flows | identifies sources(inflows) and uses (outflows) of cash |
| 1. Which of the following is a potential cost of the public disclosure of accounting information? | -Loss of competitive advantage caused by revealing information to competitors -Potential increased regulation and taxes due to reporting excessive profits in politically sensitive industries -Raising + then failing to meet the expectations of investors |
| 2. Banks that lend money to corporations are considered | creditors |
| 3. Which of the following financial statements reports the financial condition of a company at a point in time? | the balance sheet |
| 4. Which of the following is not one of the four basic financial reports? | the notes to the financial statements |
| 5. Which of the following expressions is a correct statement of the accounting equation? | Assets = liabilities + equity |
| Does a statement of cash flows report on a period of time or at a point in time? Also, explain the information and activities conveyed in that report. | reports on cash inflow and outflow of company's investing, operating and financing activities -the sum of all 3 three yields the net change in cash -it reports revenues and expenses |
| Explain what is meant by the articulation of financial statements. | refers to the updating of the balance sheet info contained in the income statement or the statement of cash flows example: earnings is increased each period by any profit earned |
| The trade-off between risk and return is a fundamental business concept | refers to income and the uncertainty about the return of earnings example: savings account pays a low return so the risk is lower |
| Why might a company voluntarily disclose more information than is required by GAAP? | the benefits of doing so outweigh the costs -lower interest and better terms -higher stock prices and greater access to equity investors |
| Financial statements are used by several interested stakeholders. Develop a listing of three or more potential external users of financial statements and their applications. | -lenders measuring the risk and return of loans -shareholders for assessing the potential -analysts for assessing investments potential |
| What ethical issues might managers face in dealing with confidential information? | issues concerning managers benefiting by the use of confidential info employers or customers might harmed |
| Return on equity (ROE) is an important summary measure of financial performance. How is it computed? Describe what this metric reveals about company performance | net income/average stockholders equity popular measure of analysis because it compares the level of return earned |
| Discuss the reasons why companies have traditionally opposed the efforts of regulatory agencies like the SEC to require more disclosure. | resisted demands to protect their competitive position -companies must weigh the benefit they receive from the market as a result of more transparent and revealing financial reporting against the cost of divulging |
| What are generally accepted accounting principles and what organization presently establishes them? | GAAP are the various methods, rules, practices, and other procedures that have evolved over time -set by FASB- financial accounting standards board |
| What are International Financial Reporting Standards (IFRS)? What potential issues can you see with requiring all public companies to prepare financial statements using IFRS? | accounting methods, rules and principles established by the IASB (Internationals accounting standards board), but the IASB has no enforcement authority and the IFRS may create false impressions that everyone is following the same rules |
| What is the primary function of the auditor? To what does the auditor attest in its opinion? | express an opinion on whether the financial statements fairly present the financial condition of the company and free from material misstatements |
| What are the objectives of financial accounting? Which of the financial statements satisfies each of these objectives? | -useful to investors, creditors, and other decision makers -help investors and creditors assess the act, timing and uncertainty of cash -economic resources and financial claims on resources -allows decision makers to monitor company management |
| Assets | something that we own that is expected to provide future benefits -cash -receivables -inventories -plant, property and equipment |
| Liabilities | current obligation that will require a future sacrifice -accounts payable -accrued liabilities -notes payable -long-term debt |
| Equity | the difference between assets and liabilities -contributed capital -additional paid-in capital -earned capital -treasury stock |
| Which of the following conditions must exist for an item to be recorded as an asset? | Item must be expected to yield future benefits. |
| Company assets that are excluded from the company financial statements | are presumably reflected in the company’s stock price. |
| If an asset declines in value, which of the following must be true? | Either a liability or equity also declines or another asset increases in value |
| Which of the following is true about accrual accounting? | Accrual accounting is required under GAAP. |
| Which of the following options accurately identifies the effects a cash sale of an iPhone has on Apple’s accounts? | Cash increases, sales revenue increases, cost of goods sold increases, and inventory decreases. |
| Two important concepts that guide income statement reporting are the revenue recognition princi-ple and the expense recognition principle. Define and explain each of these two guiding principles. | -Revenue recognition requires that revenues be recognized when earned. rights, risks, and obligations have been transferred to the buyer -expense recognition requires that expenses be recognized when assets are diminished |
| GAAP is based on the concept of accrual accounting. Define and describe accrual accounting | entails the recognition of revenue under the revenue recognition principle and the recognition of expenses when net assets decreases from the process of earning revenue |
| What is the statement of stockholders’ equity? What information is conveyed in that statement? | provides information relating to all events that impact stockholders' equity during the period. |
| What are the two essential characteristics of an asset? | must be owned (having title) and it must provide future benefits (future inflows of cash) |
| What does the concept of liquidity refer to? Explain | generally refers to cash -how much cash do we have -how much cash is being generated -how much cash can we raise quickly some cash are more liquid than others |
| What does the term current denote when referring to assets? | means that the asset will be liquidated within the next year |
| Assets are recorded at historical costs even though current market values might, arguably, be more relevant to financial statement readers. Describe the reasoning behind historical cost usage | are used by accountants and are more reliable than using market values. Market values are bias because you are not able to measure them accurately and managers may intervene with the process |
| Identify three intangible assets that are likely to be excluded from the balance sheet because they cannot be reliably measured | examples are goodwill, patents and trademarks, contractual agreements like royalties, leases and franchise agreements |
| How does the quick ratio differ from the current ratio? | both measure of a firm's ability to pay its obligations as they come due; measures of a firm's liquidity -current ratio= firm's current assets/current liabilities quick ratio is an even more conservative measure |
| What three conditions must be satisfied to require reporting of a liability on the balance sheet? | -liability reflects a probable future sacrifice on the part of the organization -amt of the obligation is known or can be reasonably estimated -transaction that caused the obligation has occurred |
| Define net working capital. Explain how increasing the amount of trade credit can reduce the net working capital for a company. | net working capital=current assets-current liabilities increasing the act of trade credit, increases liabilities and reduces net capital |
| On December 31, 2018, Miller Company had $700,000 in total assets and owed $220,000 to credi-tors. If this corporation’s common stock totaled $300,000, what amount of retained earnings is reported on its December 31, 2018, balance sheet? | 700,000 assets - 220,000 liabilities = 480,000 stockholder's equity 480,000 stockholder's equity - 300,000 common stock = 180,000 retained earnings |
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vtlove116
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