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Financial Accounting
Financial Accounting Unit 1
| Question | Answer |
|---|---|
| What is the accounting equation? | Assets = Liabilities + Owners’ Equity |
| What does the balance sheet show? | A snapshot of a company’s financial position at a specific point in time. |
| What are assets? | Resources owned or controlled by a company expected to provide future economic benefits. |
| Give three examples of assets. | Cash, Accounts Receivable, Inventory |
| What are the key characteristics of an asset? | Probable future benefit, company ownership/control, measurable in money, future economic gain |
| What are liabilities? | Obligations that will result in future economic sacrifices due to past events. |
| Give three examples of liabilities. | Accounts Payable, Taxes Payable, Mortgage Payable |
| What are the key characteristics of a liability? | Future sacrifice, past transaction, obligation to pay, measurable in money |
| What is owners’ equity? | The residual interest in assets after liabilities are paid. |
| What are the two main sources of owners’ equity? | Capital Stock (Paid-In Capital) and Retained Earnings |
| What increases owners’ equity? | Owner investments and retained earnings from net income |
| What decreases owners’ equity? | Owner withdrawals (dividends) and business losses |
| What’s another term for owners’ equity in a corporation? | Stockholders’ Equity |
| In liquidation, who has first claim on assets? | Creditors (liability holders) |
| What is a balance sheet? | Report of the assets, liabilities, and equity of a company as of a point in time |
| Which item is a liability? | Accounts payable |
| Which item is an owners’ equity item? | Retained earnings |
| Strime Company's assets equal $104,000, and its stockholders' equity totals $68,500. What is the amount of its liabilities? | $35,500 |
| The Whole Pine Company's liabilities equal $124,000, and its stockholders' equity totals $68,500. What is the amount of its assets? | $192,500 |
| Which is the proper description of the accounting equation? | Assets = Liabilities + Owners’ Equity |
| After the effects of every transaction are considered and recorded, what must the accounting equation do? | Equal itself, or balance |
| What is the main purpose of the balance sheet? | To show a company's financial position at a specific point in time. |
| What is the fundamental accounting equation? | Assets = Liabilities + Owners’ Equity |
| How are assets classified on the balance sheet? | As current (used or converted within 1 year) or long-term (held > 1 year). |
| List three examples of current assets. | Cash and equivalents, Accounts Receivable, Inventory |
| What is the most liquid asset? | Cash and cash equivalents |
| What does PP&E stand for? | Property, Plant, and Equipment |
| What are intangible assets? | Non-physical assets with value, like patents or goodwill |
| How are liabilities classified? | As current (due within 1 year) or long-term (due after 1 year) |
| Give three examples of current liabilities. | Accounts Payable, Accrued Liabilities, Unearned Revenue |
| What is unearned revenue? | Payments received for goods/services not yet delivered |
| What is owners’ equity? | The residual interest in assets after liabilities are subtracted |
| What are the main components of stockholders’ equity? | Common Stock, Additional Paid-In Capital, Retained Earnings, Treasury Stock, AOCI |
| What is retained earnings? | Accumulated profits reinvested in the company |
| What is treasury stock? | Shares repurchased by the company (reduces equity) |
| What are cash equivalents? | Short-term investments maturing in 3 months or less (e.g., T-bills) |
| What is the operating cycle? | Cash → Inventory → Sales → Accounts Receivable → Cash |
| Why aren’t internally created intangible assets like brand names recorded on the balance sheet? | They are difficult to value reliably. |
| Where does the money to buy assets come from? | From liabilities (debt) and equity (owner investments) |
| Which statement best describes the main features of inventories? | Goods purchased and held for sale |
| What is a classified balance sheet? | A balance sheet that distinguishes between current and long-term assets |
| What does owners’ equity represent? | The difference between total assets and total liabilities |
| For most companies, when assets or liabilities are classified as “current” on the balance sheet, it generally means the related assets or liabilities will be turned into cash or will be required to be paid, respectively, within what time frame? | The next year |
| What is owners’ equity? | A residual amount representing the net assets available after all obligations have been satisfied |
| Which item is an asset? | Accounts receivable |
| According to the accounting equation, what is the correct computation of owners’ equity? | Total Assets – Liabilities |
| What is an accurate description of accounts payable? | Obligation arising from the purchase of inventory on account |
| What is the basic formula of the income statement? | Revenues – Expenses = Net Income (or Loss) |
| What qualifies as revenue? | The value of goods or services provided during normal operations. |
| What are three common types of revenue? | Sales revenue, Service revenue, Interest revenue |
| True or False: Borrowing money is considered revenue. | False – It’s a liability, not revenue. |
| When is revenue earned? | When goods or services are delivered—not when cash is received. |
| What are expenses? | The cost of resources used to generate revenue. |
| Name three common business expenses. | Wages, rent, advertising |
| What is COGS (Cost of Goods Sold)? | The direct cost of products sold. |
| What does Gross Profit equal? | Sales Revenue – COGS |
| What is SG&A? | Selling, General, and Administrative expenses like salaries, rent, and marketing. |
| What is Depreciation Expense? | The allocation of a long-term asset’s cost over its useful life. |
| What is the formula for Straight-Line Depreciation? | Cost ÷ Useful Life |
| Why is depreciation considered a non-cash expense? | It reduces net income but doesn’t involve an actual cash outflow. |
| What is Bad Debt Expense? | Estimated amount of credit sales that will not be collected. |
| What is Interest Expense? | The cost of borrowing money. |
| Why is interest expense tax-deductible? | Because it’s considered a business expense. |
| Which types of cash outflows are NOT considered expenses? | Loan principal payments, buying assets, and paying off payables. |
| Which companies rely heavily on R&D expenses? | Tech and innovation-focused firms like Amazon. |
| What are examples of non-revenue cash inflows? | Loan proceeds, equipment sales, and collection of past receivables. |
| Why is understanding revenue and expense recognition important? | It helps assess profitability and financial health accurately. |
| What is an example of an expense that fits under the heading “selling, general, and administrative expense”? | Sales |
| What is an income statement? | Report of the revenues and expenses of a company during a period |
| What is depreciation expense? | The amount of wear and tear on long-lived assets during the year |
| What is an example of an expense that fits under the heading “selling, general, and administrative expense”? | Wages of company headquarters accounting staff |
| Which are components of an income statement? | Revenue and expenses |
| What is the formula for Net Income? | Net Income = Total Revenues – Total Expenses |
| What does Net Income indicate? | Whether the company generated or lost value during a period. |
| What happens when expenses > revenues? | The company reports a Net Loss. |
| Why is Net Income important? | It affects retained earnings, reflects profitability, and informs investors and managers. |
| What is the formula for Earnings Per Share (EPS)? | EPS = Net Income ÷ Shares Outstanding |
| What does EPS show investors? | How much profit is attributable to each share of stock. |
| What are the two types of EPS? | Basic EPS and Diluted EPS |
| What is Basic EPS? | EPS calculated using the current number of shares outstanding. |
| What is Diluted EPS? | EPS calculated assuming all potential shares (e.g., options) are converted. |
| Why might Diluted EPS be lower than Basic EPS? | Because it includes more potential shares, spreading income across a larger base. |
| Example: Delta Airlines (2018) Net Income? | $3.94 billion |
| Delta Airlines (2018) Basic EPS and Diluted EPS? | Basic EPS = $5.69, Diluted EPS = $5.67 |
| Why are Net Income and EPS useful together? | Net income shows total profitability; EPS shows profit per share, making it easier to compare firms. |
| What is net income? | The amount by which revenues exceed expenses |
| How is earnings per share (EPS) computed? | Net income divided by the number of shares |
| What is bad debt expense? | Amount of uncollectible accounts created by credit sales during the year |
| Which item is an expense item? | Cost of Goods Sold |
| What is a single-step income statement? | Groups and total revenues; groups and total expenses |
| What is “gross profit”? | Sales − Cost of Goods Sold. |
| What is a company’s gross profit percentage? | Gross Profit ÷ Sales |
| What does the statement of cash flows track? | Actual cash moving in and out of a business over a specific period. |
| What are the two critical questions answered by the cash flow statement? | Where did the cash come from? Where did the cash go? |
| How is the cash flow statement different from the income statement? | Cash flow statement shows real cash transactions. Income statement includes non-cash items (like depreciation and accruals). |
| What does the cash flow statement help evaluate? | Operating strength Financial flexibility Earnings quality |
| Why is the statement of cash flows important? | Because a company can show net profit but still run out of cash. |
| What year was the cash flow statement introduced? | 1988 |
| Why was the cash flow statement introduced? | Traditional statements hid liquidity issues Investors needed clarity on cash health |
| What three activities are reported in the cash flow statement? | Operating activities Investing activities Financing activities |
| What does the cash flow statement show that the income statement might not? | Liquidity risk and whether profits are backed by actual cash. |
| How does the cash flow statement help with future planning? | It acts as a forecasting tool by showing cash trends. |
| What is the difference between economic performance and liquidity? | Economic performance = profitability (income statement) Liquidity = actual cash flow (cash flow statement) |
| Final Thought: The income statement shows if a company is ________, the cash flow statement shows if it can ________. | Performing; survive |
| What are the three main categories of cash flows in the statement of cash flows? | Operating Activities Investing Activities Financing Activities |
| What are cash equivalents? | Short-term, highly liquid investments (e.g., Treasury bills, money market funds) that are readily convertible to cash and have minimal value risk. |
| What do operating activities represent? | Cash flows from day-to-day business operations. |
| Give 3 examples of operating cash inflows. | Cash collected from customers Interest income Dividend income |
| Give 3 examples of operating cash outflows. | Wages and salaries Inventory purchases Utilities and taxes |
| What do investing activities include? | Cash flows from acquiring or selling long-term assets and investments. |
| Give 2 examples of investing cash outflows. | Purchase of equipment (PPE) Loans made to others |
| Give 2 examples of investing cash inflows. | Sale of equipment Collection on loans |
| What do financing activities represent? | Cash flows from transactions with owners and creditors. |
| Give 2 examples of financing cash inflows. | Issuing stock Borrowing via loans or bonds |
| Give 2 examples of financing cash outflows. | Repayment of loans Dividend payments |
| How do the three financial statements connect? | Operating: Links income statement and current assets/liabilities Investing: Reflects changes in long-term assets Financing: Reflects changes in long-term liabilities and equity |
| What’s the main purpose of the statement of cash flows? | To show where cash comes from and where it goes—providing insight into liquidity, financial health, and sustainability. |
| Final Thought: Operating = ___ the business Investing = ___ the business Financing = ___ the business | Operating = Run Investing = Grow Financing = Fund |
| What is a statement of cash flows? | Report of the operating, investing, and financing cash flows of a company during a period. |
| What are financing activities? | Those activities whereby cash is obtained from or repaid to owners and creditors. |
| What are the major activities in the cash flow statement? | Financing, operating, and investing |
| What are the three categories of cash flow on the statement of cash flows? | Operating Activities Investing Activities Financing Activities |
| What do operating activities represent? | Cash flows from daily business operations (revenue generation and expenses). |
| Give 3 examples of operating cash inflows. | Sales of goods/services Interest income Dividend income |
| Give 3 examples of operating cash outflows. | Payments for inventory Wages and salaries Rent and utilities |
| What do investing activities involve? | Cash flows from buying and selling long-term assets or investments. |
| Give 3 examples of investing cash inflows. | Sale of equipment Sale of business units Collection of principal on loans |
| Give 3 examples of investing cash outflows. | Purchase of equipment Buying long-term securities Lending to other entities |
| What do financing activities reflect? | Cash flows from debt and equity transactions. |
| Give 2 examples of financing cash inflows. | Issuing stock Borrowing through loans or bonds |
| Give 3 examples of financing cash outflows. | Loan repayments Dividend payments Stock repurchases |
| What do each of the cash flow categories support? | Operating: Day-to-day business Investing: Future growth through asset acquisition Financing: Capital raising to support operations and investments |
| Which of these items is a use of cash in a financing activity? | Repaying loans |
| Which of these items is a source of cash for a financing activity? | Borrowing money |
| Which of these items is a source of cash for an operating activity? | Collecting cash from customers |
| Which of these items is a use of cash in an investing activity? | Buying a machine |
| What is "articulation" in financial statements? | The concept that all financial statements are interconnected and changes in one affect others. |
| What are the four core financial statements? | Balance Sheet Income Statement Statement of Retained Earnings Statement of Cash Flows |
| What does the Income Statement report? | Revenues, expenses, and net income over a specific period. |
| How does the income statement connect to the statement of retained earnings? | Net income increases retained earnings; dividends reduce it. |
| How does the statement of retained earnings connect to the balance sheet? | Ending retained earnings appear under owner’s equity on the balance sheet. |
| How does the statement of cash flows connect to the balance sheet? | It explains changes in the cash account from beginning to ending balance. |
| Example: If a company has a $4B net income and pays $0 dividends, how does this affect retained earnings? | Retained earnings increase by $4 billion. |
| Why is articulation important? | It ensures consistency, accuracy, and provides a full picture of financial health. |
| Where does beginning cash on the statement of cash flows come from? | The prior year’s balance sheet. |
| What does each statement reveal? | Income Statement: Profitability Cash Flow Statement: Liquidity Statement of Retained Earnings: Equity changes Balance Sheet: Financial position |
| What is articulation? | The relationship among financial statements whereby an item on the income statement or statement of cash flows helps explain the period-to-period change in an item on the balance sheet |
| Which financial statement provides a detailed explanation of one component in the year-to-year change in the retained earnings balance? | Income statement. |
| Which financial statement provides a detailed explanation of the year-to-year change in the cash account balance? | Statement of cash flows. |
| What are investing activities? | Activities associated with buying and selling long-term assets like land, buildings, and equipment |
| According to the accounting rules, what are operating activities? | Those activities that are part of the day-to-day business of a company |
| What is an asset? | An economic resource that is owned or controlled by a company |
| The liabilities of a company are $46,200, and its owners' equity is $35,800. What is the amount of this company’s assets? | $82,000 |
| What is revenue? | The amount of assets created through the sale of goods and services |
| What is an operating activity? | Selling goods |
| To which item on the balance sheet does net income articulate? | Retained Earnings |
| What is a use of cash from a financing activity? | Paying dividends |
Created by:
heavenlypure
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