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FMA
Financial and Managerial Accounting Unit 2
| Question | Answer |
|---|---|
| What is the purpose of financial statements in decision-making? | Financial statements assist in decision-making by providing insights into a company's financial health and performance. |
| What are the three primary financial statements? | Balance Sheet Income Statement Statement of Cash Flows |
| What does the Balance Sheet show? | The Balance Sheet shows a company's asset and liability mix. |
| What does the Income Statement reveal? | Shows revenues (assets generated through business) and expenses (assets used or liabilities incurred for operations). It calculates net income as revenues minus expenses. |
| What does the Statement of Cash Flows detail? | The Statement of Cash Flows details cash inflows and outflows. |
| Why is it important to analyze all three financial statements? | Analyzing all three statements provides a more complete view of a company’s financial health and prevents misleading conclusions from focusing on just one. |
| What unique aspect of a company does each financial statement emphasize? | Balance Sheet: Asset and liability structure Income Statement: Profitability Cash Flow Statement: Cash movement |
| How does financial statement analysis help a company? | Financial statement analysis helps evaluate past performance, predict future trends, identify potential issues, and guide further research. |
| What is the process of financial statement analysis? | Financial statement analysis is the process of reviewing and interpreting financial statements to assess a company’s performance. |
| What are the financing sources shown in the Balance Sheet? | Banks (loans) Shareholders (investments) Profitable operations (reinvested earnings) |
| What is the bottom line of the Income Statement? | Is net income, calculated as revenues minus expenses. |
| What does the Statement of Cash Flows focus on? | The Statement of Cash Flows focuses on cash inflows (incoming) and cash outflows (outgoing) during a specific period, providing insight into a company’s liquidity and cash management. |
| How do the three main financial statements provide a comprehensive view of a company’s financial health? | The Balance Sheet lists assets and shows how they are financed. The Income Statement shows profits (revenues minus expenses). The Statement of Cash Flows tracks cash inflows and outflows. |
| What is the purpose of financial statements for publicly traded companies? | Financial statements summarize a company’s financial health and are used by investors, creditors, and other stakeholders to evaluate performance and make decisions. |
| Why can accessing financial statements be difficult for privately held companies? | Privately held companies are not required by law to publicly disclose their financial statements, unlike publicly traded companies. |
| What role does the SEC play in financial reporting? | The SEC regulates financial markets and ensures companies provide reliable and transparent financial information to investors and creditors. |
| What is Form 10-K? | Form 10-K is an annual filing that provides comprehensive financial information about a publicly traded company, including the balance sheet, income statement, and statement of cash flows. |
| How can you locate a company’s Form 10-K? | You can locate a company’s Form 10-K using the SEC’s EDGAR database by searching for the company name and filtering by Form 10-K filings. |
| What does Form 10-K include? | Form 10-K includes the company’s operations, risks, properties, legal proceedings, management analysis, and financial statements. |
| What is the purpose of the SEC’s EDGAR database? | The SEC’s EDGAR database allows users to access and view the filings of publicly traded companies, including Form 10-K and Form 10-Q. |
| What is the difference between Form 10-K and Form 10-Q? | Form 10-K is filed annually and provides comprehensive annual financial data, while Form 10-Q is filed quarterly with financial data for each quarter. |
| What is the role of the Central Index Key (CIK)? | The CIK is used to identify unique companies in the SEC’s 10-K filing database. |
| Why was the SEC created? | The SEC was created after the 1929 Great Depression to regulate financial markets and ensure the availability of reliable financial information. |
| How often is the Form 10-Q filed? | The Form 10-Q is filed quarterly. |
| How often is the Form 10-K filed? | The Form 10-K is filed annually. |
| What are the key elements of the balance sheet? | Assets – What the company owns. Liabilities – What the company owes. Owners' Equity – The difference between assets and liabilities, representing ownership. |
| What does the balance sheet help assess? | The balance sheet helps assess a company’s liquidity (ability to meet short-term obligations) and solvency (ability to survive long-term with its current debt structure). |
| What are examples of assets? | Cash Accounts Receivable Inventory Buildings |
| What are examples of liabilities? | Accounts Payable Taxes Payable Mortgage Payable Unearned Revenue |
| What is owners' equity? | Owners' equity represents the value of assets after liabilities are deducted and includes funds from capital stock (investments from shareholders) and retained earnings (profits kept in the business). |
| What is the accounting equation that the balance sheet is based on? | Assets = Liabilities + Owners' Equity |
| What are the two main categories of assets on the balance sheet? | Current Assets – Expected to be converted into cash within one year (e.g., cash, receivables). Long-Term Assets – Expected to be used for more than one year (e.g., property, equipment). |
| What are the two main categories of liabilities on the balance sheet? | Current Liabilities – Obligations due within one year (e.g., accounts payable, short-term loans). Long-Term Liabilities – Obligations due after one year (e.g., mortgages, long-term loans). |
| What are the limitations of the balance sheet? | Historical Cost: Assets are recorded at original purchase cost, not current market value. Intangible Assets: Some valuable assets like brand value and reputation are not reflected. Market vs. Book Value: The balance sheet may not reflect a company’s mar |
| What is double-entry accounting? | Double-entry accounting ensures that every transaction is recorded in two ways: the asset acquired and the source of funding for that asset, maintaining balance in the accounting equation. |
| What is the formula for calculating owner's equity? | Owner’s Equity = Assets - Liabilities |
| What are some examples of intangible assets not reflected on the balance sheet? | Examples include brand value, reputation, customer loyalty, and intellectual property. |
| Why might a balance sheet understate the value of a tech-driven company? | Because the balance sheet doesn’t include intangible assets like intellectual property, brand value, or reputation, which are often critical to the value of tech-driven businesses. |
| What does the balance sheet fail to capture for modern businesses? | The balance sheet may fail to capture valuable intangible assets and the true market value of the company, especially for businesses focused on technology, branding, or innovation. |
| How are assets listed on the balance sheet? | Current Assets – Assets expected to be converted to cash within a year. Long-term Assets – Assets expected to be used for more than a year. |
| How is owners' equity represented on the balance sheet? | Paid-in Capital (investment by owners) Retained Earnings (profits reinvested into the business). |
| Why does the balance sheet not reflect the current value or worth of a company? | Many assets are recorded at cost, and some economic assets are not recorded at all. |
| Which statement best characterizes the elements and purposes of a balance sheet? | A balance sheet portrays the financial condition of a company at a point in time. |
| What is owners’ equity? | The residual amount representing the net assets available to another party after all obligations have been satisfied |
| What information should be included on the balance sheet? | Assets and liabilities |
| What is the purpose of the income statement? | The income statement helps assess a company’s profitability and long-term earning potential by reporting net income. |
| What are the key elements of the income statement? | The key elements are Revenues, Expenses, and Net Income (or Net Loss). |
| How are revenues defined in the income statement? | Revenues represent the increase in assets from the sale of goods and services. |
| What are some examples of revenue generation? | Walmart generates revenue from product sales and membership fees, Microsoft from software and hardware sales, and Disney from media networks, parks, resorts, and consumer products. |
| How are expenses defined in the income statement? | Expenses represent the consumption of assets in generating revenues. |
| What is Net Income? | Net Income is the difference between revenues and expenses when revenues exceed expenses. |
| What is the formula to calculate Net Income? | Revenues - Expenses = Net Income |
| What is the difference between Revenues, Assets, and Net Income? | Revenues represent increases in resources, while Net Income is the "net" figure after subtracting expenses from revenues. Assets can also come from activities unrelated to revenue generation. |
| What is a multistep income statement? | A multistep income statement breaks down profits at various levels, such as Gross Profit, Operating Income, and Net Income. |
| What is Gross Profit and how is it calculated? | Gross Profit is calculated as Sales - Cost of Goods Sold (COGS). |
| What is the difference between Operating Income and Net Income? | Operating Income focuses on a company’s core business operations, while Net Income includes operating income, interest expenses, taxes, and non-operating gains or losses. |
| What are Gains and Losses in the income statement? | Gains and Losses reflect money made or lost from activities outside the company's core operations. |
| What is Earnings (Loss) Per Share (EPS)? | EPS shows how much net income belongs to each outstanding share of stock, calculated as Net Income ÷ Outstanding Shares. |
| Why do companies use comparative income statements? | Comparative income statements present data for multiple periods (e.g., yearly) to identify trends in revenues, expenses, and net income. |
| What is the difference between the Balance Sheet and Income Statement? | The Balance Sheet represents a snapshot of a company’s financial position at a specific point in time, while the Income Statement shows performance over a specific period (e.g., month, quarter, or year). |
| What is the formula for the Balance Sheet? | Assets = Liabilities + Owner’s Equity |
| What is Revenue? | Revenue is the amount of assets a company creates through business activities, such as selling goods or services. |
| Can revenue be generated by satisfying liabilities? | Yes, revenue can be generated by satisfying liabilities, such as providing a service or performing work instead of paying off a debt in cash. |
| What are Expenses? | Expenses are the amount of assets consumed in doing business, such as salaries, utilities, and inventory costs. |
| Can expenses create liabilities? | Yes, expenses can create liabilities, such as pension obligations or environmental costs, which represent future liabilities. |
| How do Net Income and Revenue differ? | Net Income is the difference between revenues and expenses over a period of time, while revenue is the increase in assets from business activities like selling goods or services. |
| What is the role of net income in evaluating a company’s performance? | Net income is a critical measure of a company’s overall performance and affects the owner’s equity. |
| What is the purpose of Gross Margin Percentage? | The Gross Margin Percentage is used to assess a company's profitability by comparing gross profit to sales. |
| What is net income? | The amount by which revenues exceed expenses |
| What is a gain? | Making money from an activity outside the normal activities of a business |
| What is an income statement? | A report of the revenues and expenses of a company during a period |
| What is the purpose of the Statement of Retained Earnings? | It shows how much of the company's earnings are retained in the business after accounting for dividends paid to owners, connecting the income statement and balance sheet. |
| What are the key components of the Statement of Retained Earnings? | Beginning Retained Earnings, Net Income, Dividends Paid, and Ending Retained Earnings. |
| What is the formula to calculate Ending Retained Earnings? | Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings. |
| How does Net Income affect the accounting equation? | Net income increases assets and retained earnings, boosting owner’s equity. |
| How do Dividends affect the accounting equation? | Dividends decrease assets (e.g., cash) and reduce retained earnings, lowering owner’s equity. |
| What is the difference between Retained Earnings and Cash? | Retained earnings may not be in the form of cash; they can be used for inventory, equipment, or paying off debts. |
| What is the alternative to the Statement of Retained Earnings? | Some companies use the Statement of Stockholders’ Equity, which includes changes in capital stock in addition to retained earnings. |
| What does the formula for Retained Earnings look like? | Retained Earnings = Cumulative Net Income - Cumulative Dividends. |
| How does the Statement of Retained Earnings impact a company's financial health? | It shows how earnings are reinvested in the business or distributed to shareholders, affecting long-term growth and financial stability. |
| What are the three main sources from which a company can get money to buy assets? | Borrowing money, Paid-in capital (owner investment), and Retained earnings (profits kept in the business). |
| What is the role of dividends in the Statement of Retained Earnings? | Dividends reduce retained earnings as they represent the portion of earnings distributed to shareholders. |
| What is an example of how retained earnings work for ExxonMobil? | In 2012, ExxonMobil’s Beginning Retained Earnings were $331 billion, Net Income was $45 billion, Dividends paid were $10 billion, and Ending Retained Earnings were $366 billion. |
| What does the expanded accounting equation look like? | Assets = Liabilities + Capital Stock + Retained Earnings. |
| How do Retained Earnings relate to the expanded accounting equation? | Retained Earnings reflect the cumulative net income kept in the business, minus the cumulative dividends paid. |
| What are Retained Earnings? | Retained earnings are the cumulative net income of a company, minus the dividends paid to shareholders, that are kept in the business for reinvestment. |
| How is Retained Earnings different from Paid-in Capital? | Retained earnings come from accumulated profits over time, while paid-in capital is the amount directly invested by the company’s owners. |
| What does the Statement of Retained Earnings track? | It tracks changes in retained earnings over a period, illustrating how profits are retained or distributed. |
| How are profits retained in a business used? | Profits retained in the business are reinvested to help the company grow, buy assets, and operate. |
| What is the relationship between the Income Statement and the Statement of Retained Earnings? | The income statement shows net income, which is used in the statement of retained earnings to calculate changes in retained earnings over time. |
| What does the expanded accounting equation show about retained earnings? | It shows that retained earnings are part of a company’s equity, reflecting the cumulative profits kept in the business after dividends. |
| Which statement best characterizes the elements and purposes of a statement of retained earnings? | A statement of retained earnings portrays the accumulated profits or losses of a company at a point in time. |
| What is the purpose of the statement of cash flows? | It shows cash inflows and outflows during a specific period, highlighting how cash is generated and used. |
| What are common cash inflows? | Selling goods/services, selling assets, borrowing money, and investments from owners. |
| What are common cash outflows? | Paying operating expenses, purchasing assets, repaying loans, and paying dividends. |
| What are the three classifications of activities in the statement of cash flows? | Operating Activities, Investing Activities, Financing Activities. |
| What are operating activities? | Day-to-day business operations like selling goods, paying wages, and paying for inventory. |
| What are investing activities? | Buying and selling long-term assets such as land, buildings, or equipment. |
| What are financing activities? | Cash obtained from or repaid to owners or creditors, such as loans, stock issuance, and dividend payments. |
| How do financial statements articulate with each other? | The Income Statement affects Retained Earnings on the Balance Sheet, and the Statement of Cash Flows affects the Cash Balance on the Balance Sheet. |
| What is the role of operating activities in the statement of cash flows? | They involve routine business actions like collecting cash from customers and paying for inventory and wages. |
| What is the role of investing activities in the statement of cash flows? | They involve buying or selling long-term assets like property, equipment, and acquisitions. |
| What is the role of financing activities in the statement of cash flows? | They involve transactions to raise or repay capital, such as borrowing, issuing stock, and paying dividends. |
| How does the Statement of Cash Flows explain changes in cash? | It explains the changes in cash by categorizing cash inflows and outflows into operating, investing, and financing activities. |
| How do the Balance Sheet, Income Statement, and Statement of Cash Flows interconnect? | The Balance Sheet shows the company’s financial position, the Income Statement shows net income, and the Statement of Cash Flows explains the cash changes. |
| What is the connection between the Statement of Cash Flows and the Balance Sheet? | The Statement of Cash Flows explains the change in cash, which is reflected on the Balance Sheet. |
| How does the Income Statement affect the Balance Sheet? | The net income from the Income Statement affects the Retained Earnings on the Balance Sheet. |
| What is the role of Retained Earnings in the Balance Sheet? | Retained Earnings show how much of the net income is kept in the company versus distributed as dividends. |
| What does the Statement of Cash Flows tell us about a company? | It shows where cash comes from (inflows) and how it’s used (outflows) during a specific period, categorized by activities. |
| Which of these activities is an investing activity? | Buying buildings |
| Which of these activities is an operating activity? | Selling goods |
| What is a statement of cash flows? | A report of the operating, investing, and financing cash flows of a company over a period of time |
| What is the purpose of the notes to the financial statements? | They provide essential details for interpreting financial statements, including assumptions, methods, and qualitative information. |
| What are the four key categories of information in the notes to the financial statements? | 1. Summary of significant accounting policies 2. Additional information about summary totals 3. Disclosure of unrecognized information 4. Supplementary information required by regulatory bodies (e.g., FASB, SEC) |
| Why are the notes to the financial statements important? | They offer additional context that helps users better understand the primary financial statements, enabling informed decisions. |
| What type of information is included in the "summary of significant accounting policies" in the notes? | Assumptions, estimates, and methods used in preparing the financial statements, such as revenue recognition, inventory methods, and depreciation. |
| Why is the summary of significant accounting policies important? | It clarifies how the numbers were calculated, ensuring accurate comparisons with other companies, especially in the same industry. |
| What does "additional information about summary totals" in the notes provide? | Detailed explanations of summary figures in the financial statements, like the breakdown of total debt or revenue. |
| What is an example of unrecognized information disclosed in the notes? | Legal cases or uncertain events (e.g., litigation) that may affect the company but cannot be quantified in financial terms. |
| What type of supplementary information might be included in the notes? | Quarterly financial results, business segment information, and geographical revenue breakdowns, often required by the FASB or SEC. |
| How do the notes help in understanding a company's financial health? | They provide context for the primary financial statements, detailing the assumptions, risks, and operational insights that affect a company’s performance. |
| Why do the notes matter for companies like Disney or Bank of America? | They explain important details like Disney’s accounting for film production costs or Bank of America’s loan collectibility, which are crucial for accurate analysis. |
| What information about inventory is provided in the notes? | The breakdown of inventory into categories like raw materials, work in process, and finished goods, which helps assess a company's operations. |
| How does the note disclosure about seasonality help investors? | It provides insight into seasonal fluctuations, such as Toys R Us' 40% of annual sales coming from the holiday season, which helps understand business cycles. |
| Why are legal proceedings disclosed in the notes? | To inform stakeholders about ongoing lawsuits, potential risks, and uncertainties that may not be reflected in the financial statements. |
| What is the purpose of supplementary information in the notes? | It provides additional insights beyond the primary financial statements, such as business segment performance and geographical sales breakdowns. |
| How does ExxonMobil use the notes to explain its oil and gas reserves? | The notes provide details about proved and unproved reserves, their quantities, and geographical locations, which are essential for evaluating future revenue potential. |
| What does the "disclosure of unquantifiable information" refer to in the notes? | Information that cannot be directly quantified or included in the financial statements, such as the status of legal cases or events after the reporting period. |
| Why is it important to understand the accounting policies used by a company, such as depreciation or inventory methods? | These policies help explain how financial numbers are calculated and ensure consistency when comparing different companies. |
| What example is given in the lesson for a company that uses notes to explain its production cost accounting? | Disney, which explains how it accounts for film and television production costs in the notes, including methods for acquired broadcast rights. |
| How do the notes help with interpreting receivables? | They provide additional details about the collectibility of receivables, such as how much of a company’s loans or debts are expected to be collected. |
| How do the notes provide clarity on a company's financial performance in different regions? | They often include a geographical breakdown of sales, revealing whether a company has exposure to high-risk areas, which is critical for risk analysis. |
| What is the purpose of a classified balance sheet? | A classified balance sheet distinguishes between current and long-term assets. |
| Which item would be classified in the owners’ equity section of the balance sheet? | Retained earnings |
| What is the purpose of the notes to the financial statements? | The notes present the assumptions needed to help explain financial statements. |
| What is the purpose of financial statement analysis? | Financial statement analysis examines relationships between financial numbers and their trends over time, helping to predict future performance, compare with industry peers, and identify problem areas for investigation. |
| What are common-size financial statements? | Common-size financial statements express each item as a percentage of a common figure (e.g., total revenue or total assets) to make it easier to compare companies of different sizes and analyze performance over time. |
| Why are common-size financial statements useful? | They allow comparisons between companies regardless of size and help track a company’s performance over time, particularly in income statements and balance sheets. |
| What does horizontal analysis do? | Horizontal analysis compares financial results over multiple periods (e.g., year-over-year) to identify trends and significant changes in financial performance. |
| How do you perform horizontal analysis in Excel? | Use basic spreadsheet formulas (e.g., =(I5-K5)/K5) to calculate the percentage change between two periods, and then copy formulas to fill in remaining cells. |
| What is the key concept behind horizontal analysis? | Horizontal analysis identifies year-over-year changes and significant trends in financial metrics such as revenue and net income. |
| What is the significance of identifying trends in horizontal analysis? | Identifying trends helps spot important anomalies or changes worth investigating, such as a decrease in sales or unusual shifts in income or expenses. |
| How does horizontal analysis help with forecasting? | Horizontal analysis helps predict future financial performance by understanding how a company’s metrics have evolved over time. |
| What are key things to look for in horizontal analysis? | Look for outliers (unusually large percentage changes), directional changes in income or expenses, and unexpected shifts that could indicate areas for further investigation. |
| How is the percentage change calculated in horizontal analysis? | The formula is: (Current Year Value - Previous Year Value) / Previous Year Value * 100. |
| What is the purpose of vertical analysis in financial statements? | Vertical analysis compares companies at the same point in time by expressing financial statement line items as percentages, allowing easier comparison between companies like Walmart and Target. |
| Why is horizontal analysis useful for decision-making? | It highlights significant trends or outliers that could indicate opportunities or issues, aiding in strategic decision-making and risk assessment. |
| How does horizontal analysis help in trendspotting? | It can reveal positive or negative trends over time, giving a clearer picture of a company’s financial health and potential future performance. |
| What does a common-size income statement express? | It expresses each income statement item as a percentage of total revenue, which helps analyze relative profitability and costs over time. |
| What are the types of financial analysis covered in the lesson? | Horizontal analysis (comparing data over time), vertical analysis (comparing data at a single point in time), and common-size financial statements (comparing percentages of common figures). |
| What is the purpose of vertical analysis? | Vertical analysis compares companies at the same point in time by standardizing financial data into percentages of total revenue (income statement) or total assets (balance sheet), allowing for easier comparison, especially among companies in the same ind |
| What does vertical analysis help identify? | It helps identify differences in financial performance, cost structures, profitability, and areas that require further investigation, such as differences in expenses or margins. |
| How do you perform vertical analysis on an income statement? | Divide each line item by total revenue for the period to express it as a percentage of sales. |
| How do you perform vertical analysis on a balance sheet? | Divide each line item by total assets to express it as a percentage of total assets. |
| What is the formula to calculate the percentage of sales for a line item in vertical analysis? | The formula is: = (Income Statement Amount) / (Sales or Revenue). |
| What is a common-size income statement? | A common-size income statement expresses each item as a percentage of total sales or revenue, making it easier to compare companies and analyze their performance. |
| How does vertical analysis help compare companies of different sizes? | Vertical analysis standardizes financial data into percentages, allowing for meaningful comparisons regardless of the size of the companies. |
| What is the significance of comparing companies in the same industry using vertical analysis? | It helps highlight differences in performance and cost structures, making it easier to evaluate operational efficiency, profitability, and business models within the same industry. |
| How does vertical analysis help identify areas for further investigation? | It raises questions about the reasons behind differences in financial performance, such as why one company has higher gross margins, operating expenses, or tax provisions, prompting deeper analysis. |
| Why is vertical analysis particularly useful when comparing companies in the same industry? | Companies in the same industry tend to have similar revenue structures, so vertical analysis helps highlight differences in their operational efficiency, profitability, and cost management. |
| How does vertical analysis assist in understanding operational efficiency? | It helps to see how a company allocates its revenue across various expenses (such as R&D, sales, and marketing), which provides insights into its business model and operational focus. |
| What are the main takeaways from vertical analysis? | Vertical analysis highlights differences in performance and cost allocation, generates important questions, and serves as a starting point for deeper investigation into financial statements. |
| What role does vertical analysis play in financial decision-making? | Vertical analysis provides valuable insights into a company’s financial structure, helping managers, analysts, and investors identify areas for improvement, investigate differences, and make informed strategic decisions. |
| What is the definition of vertical analysis of financial statements? | Displaying each line item as a percentage of another for comparison to other companies in the industry |
| How does vertical financial statement analysis inform your understanding of a company’s performance? | It tells you what questions you need to be asking about a company’s performance. |
| Which types of companies can be compared using vertical analysis? | Companies that provide the same types of goods or services |
| Vertical analysis allows an accountant to determine how expenses are changing relative to which line item on the income statement? | Total sales |
| Why do the notes to the financial statements contain additional information about summary totals? | Because one summary number in the financial statements represents literally thousands of individual items |
| Why do the notes to the financial statements contain a summary of significant accounting policies? | Because accounting involves making assumptions, estimates, and judgments |
| Information about accounting policies and practices, including assumptions, estimates, and judgments, are included in which element of the financial statements? | The notes to the financial statements |
| When is vertical financial statement analysis most valuable? | When comparing companies in similar industries |
| Which section of the SEC’s website contains Company Annual Report on Form 10-K filings? | EDGAR |
| Which item below is a liability? | Accounts payable |
| What is an asset? | An economic resource that is owned or controlled by a company |
| What is the definition of expense? | The amount of assets consumed through business operations |
| Which item below is a revenue item? | Sales |
| Which type of activities are financing activities? | Those activities whereby cash is obtained from or repaid to owners and creditors |
| Which statement best characterizes the purpose of the income statement? | An income statement portrays the results of operations of a company over a period of time. |
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