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75 Cards in this Set

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What are the 4 financial statements?
1) Balance Sheet
2)Income statement
3)Statement of stockholders' equity
4)statement of cash flows
What information does the balance sheet provide?
1)Balance sheet - lists assets , liabilities and stockholder equity of a company at a given time.
What information does the income statement provide?
2)income statment - contains revenues earned and expenses incurred by a company over a period of time. Revenues less expenses = net income.
What information does the statement of stockholders' equity contain?
3)Statement of stockholders' equity - describes the changes in the stockholders' equity accounts from one period to the next.
What information does the statement of cash flows provide?
4)Statement of cash flows reconciles the cash amount from one period to the next. It lists net cash flows from operating activities, investing activities and financing activities.
What is the standard auditor's report?
Divided into 3 parts. 1st part states that hte financial statements are the responsibility of management, they have been audited and the auditor's responsibility is to express an opinion on them. 2nd part didicates that the examination of the company's records was made in accordance w/ GAAP - and auditor has received resonable assurance that FS are free from material mistatement. 3rd states that the FS present fairly the financial position of the company, the results of operations and its cash flows in conformity with GAAP.
What is the management letter?
Normally state that the company's management is responsible for the preparation and integrity of the financial statements, that the statements were prepared in accordance with GAAP and that certain amounts were based on management's best estimates and judgements. It further indicates that hte company maintains a system of internal controls designed to safeguard its assets and ensure all transactions are recorded and reported properly.
What do the footnotes to the financial statements tell you?
Footnotes provide additional info about $ amounts on the financial statements. Inidicate which accounting methods were used and where the #'s on the statements are the result of assumptions and estimates made my management.
What is a debt investment?
A loan -- debt investors are called creditors. When debt investments are made, management is normally required to sign a loan contract. Creditors are primarily concerned that the interest and principal payments are met on a timely basis. since such payments are made in cash, creditors are intrested in the financial info that helps them to preditc future cash flows over the period of the loan.
What is an equity investment?
EI involve purchasing ownership interests in a company. Equity owners of corporations are called stockholders. Returns come in the form of dividends (or stock price appreciation) which tend to be large if the company performs well. Primary concern of stockholders is the performance of management - specifically its ablility to generate and mantain earning power in the future.
What is corporate governance?
Refers to the mechanisms that encourage manangement to report in good faith to and act in the interest of the stockholders. Components of corporate governance include financial information useres and captial markets, contracts between management and debit and equity investors, financial reporting regulations and standards, independent auditors, boards of directors, and audit committees, internal controls ensuring that the company is in compliance with FRC, legal liablility, professional reputation, and ethics.
What are the three basic activites of a business?
1)Financing Activities - involve the collection of capital through equity or debt issuances and any associated payments (dividends or debt payments)
2)Investing Activities- involve the aquisition and sale of producing assets, assets used to produce and support hte goods and services provided.
3)Operating Activities- Involve the sale of the goods and services. OA produce additional capital that can be reinvested, used to service debit, distribute to owners (dividends).
How are the three basic activities of a business reflected in the financial statements?
The balance sheet lists assests (goods and producing assets) and financing sources (debt, equity, and reinvestments from net earnings) at a particular point in time. The income statement is a measure of operations, the activities (revenues and expenses) involved in selling the goods and services. The statement of shareholders' equity measures the changes in contributed capital and the extent to which the business reinvests its net earnings and pays dividends. The statement of cash flows contains the cash inflows and outflows associated with the operating, investing and financing activities of the business.
What is the balance sheet and how is it used?
Asset accounts reported on the balance sheet are listed in order of liquidity and are divided into 4 categories: 1)current assets - including cash, short term investments, accounts receivable, inventory and pre-paid expenses; 2) long term investments, (long term notes-receivable, land, securities, cash value of life insurance, special investment funds); 3) property, plant and equipment; and 4)intangible assets -patents, trademarks, goodwill, etc.
Liabilites are divided into 2 categories 1) current liabilities, include short term payables and 2) long term liabilites which include long term notes, bonds, mortgages payable. The stockholders' equity section for a corporation contains contributed capital and retained earnings; the owners equity section for a partnership contains an account for each partner that records the cumulative balance of the partner's contributions less withdrawls.
What is the income statement and how is it used?
Consists of two basic categories - revenues and expenses. Revenues represent asset inflow (or liability decreases) associated with operating transactions during a given period (sales, fees earned, service revenues, other revenues - interest, book gains)
Expenses represent the asset outflows (liability increases)required to generate revenues include costs of goods sold, operating expenses, other expenses.

Revenues less expenses= net income.
What is the statement of stockholders' equity and how is it used?
Consists of the changes in two basic accounts 1) contributed capital and 2)retained earnings - past reinvested profits.
What is the statement of cash flows and how is it used?
contains 3 categories: 1)cash flows from operating activities, 2)cash flows from investing activities, 2) cash flows from financing activities.
What is the utility of the various financial statements?
Enables external users to assess the earning power and solvency position of the company. Assets generate cash thru their use and sale, and liabilites represent cash requirements. The income statement indicates how profitable the company's operations have been, the statement of cash flows shows how the company's cash is managed. The statement of stockholders' equity provides information about the investment made in the company by the stockholders.
What are the three basic activities involved in conducting a business?
Financing Activities,
Investing Activities, Operating Activities,
What are investing activites?
acquisition and sale of producing assets, the assets used to produce and support the goods and services provided.
What are Financing activities?
collection of capital through equity or debt issuances and any associated payments such as dividends and debt payments.
What are operating activities?
involve the sale of goods and services. These activities produce additional capital that can be reinvested in the producing assets, used to service debt payments, and distributed to the owners in the form of dividends.
What is a classfied balance sheet?
A reporting of asset and liablility accounts, grouped into classifications - current assets, long term investments, property, plant, equipment, intangible assets, current liabilites, and long-term liabilities.
How are the categories of assets and the accounts within them listed? What about liabilites and the accounts within them?
In order of liquidity. Generally the assets listed near the top are expected to be converted into cash in a shorter time period than those listed at or near the bottom. The same is true for liabilities.
What are current assets?
Assets expected to be realized or converted into cash in the near future (within one year - or operating cycle - whichever is longer). Current assets include cash, short term investments, accounts receivable, inventory, prepaid expenses.
What are short term investments? Why are they made?
Include stocks, bonds, and similar investments. These securities are readily marketable, and intended by management to be sold within a short period of time (1 yr). Used to earn income on cash that would otherwise be idle for a short time. Value of this account is the total selling price (market value) of securities held as of the date of the balance sheet. Equivalent to cash for purposes of solvency assessment.
What are accounts receivable?
Represents the amount of $ a company expects to collect from its customers.
Also referred to as "credit sales" or "sales on account". $ amount on BS = total amount of receivables- uncollectables (highly subjective #)
What is inventory?
Two types. the first represents items or products on hand that a company intends to sell to its customers. - Merchandise inventory. BS value of inventory is listed at COST (or replacement cost as of BS - whichever is lower)
The second is called supplies inventory - represents items used to support a company's operations (office supplies, spare parts).
What are prepaid expenses? What financial statements do they appear on?
Expenses paid by a company before the corresponding service or right is actually used. Insurance premiums, rent, etc. Considered an ASSET- represents a benefit to be enjoyed by the company in the future (not considered an expense appearing on the income statement until it is used). Originally recorded on balance sheet at cost.
What are long term investments?
acquired by companies to provide benefits for periods of time >1year. Examples include long term notes receivable, and investments in land and debt and equity securities.
How are things like property, plant and equipment valued on the balance sheet?
Original cost reduced by an amount that approximates the asset's lost usefulness or deterioration over time. (accumulated depreciation) This give you the NET value or NET book value of the assets.
What are intangible assets? What financial statement are they carried on and how is the value determined?
So named because they have no physical substance. include things like legal rights to the use or sale of valuable names, items, processes or information. Carried on the balance sheet at net book value (cost-accumulated amortization -- some intangible assets, goodwill for example, are not subject to accumulated amortization).
What is goodwill?
represents the cost of purchasing another company over and above the market price of that company's assets and liabilites.
What are current liabilites?
Obligations expected to be paid (or services expected to be performed)with the use of assets listed in the current asset section of the balance sheet. (examples include: accounts payable, wages payable, interest payable, short term notes payable, income taxes payable, current maturities on long term debts, deferred revenues)
What are long term liabilites?
Obligations expected to require payment over a period of time beyond the current year. These obligations are usually evidenced by formal contracts that state their principal amounts, periodic interest payments and maturity dates. (examples: long term notes payable, bonds payable, mortgage payable).
What are the two parts of the stockholders equity section of the balance sheet?
Contributed capital - measure of the assets contributed directly ot the company by its owners. Contribution is exchanged of ownership interest (shares of stock).note: purchase and sale of ownership interests have no effects on the BS.
Retained Earnings - measure of the assets that have been generated thru a company's operating activities but not paid out to stockholders in the form of dividends. (not a tangible pool of cash - simply a measure of hte amount of the assets appearing on the balance sheet that hve been provided by profitable operations)
What is the formula for determining retained earnings?
RE(eb)=RE(bb)+Revenues-Expenses-Dividends
Explain the differences between a corporation and a partnership or proprietorship.
A corporation is a legal entity that is separate and distinct from its owners. Can be taxed, sued, and hte owners are legally liable only for the amount of their ORIGINAL contributions to the corporation. Stockholders aquire ownership interests by purchasing shares of stock in the corporation. Asset distributions are made on a per share basis and are called dividends.
A Partnership (or proprietorship) is not a legal entity - It can neither be taxed nor sued and the legal liability of the owners (called partners or proprietors)is not limited to their original contributions. Asset distributions to partners are called withdrawls.
What is reported on the income statement and what does it measure?
Consists of Operating revenues, operating expenses and other revenues and expenses. It measures operating performance over a particular period - the activities associated wiht the acquisition and sale of a company's inventories or services.
What are operating revenues?
represent the inflow of assests (or decrease in liabilites) due to a company's operating activities -- sales and fees earned.
Define sales
Most common revenue account, represents a measure of asset increases (cash or accounts receivable) due to selling a company's products or other inventories). Fees Earned, Service Revenue.
Cost of goods sold (COGS)account
represents the original cost of the inventory items (purchase price or cost of manufacture) that are sold to generate sales revenue. For MFG. companies inventory expense is usually separated out form other operating expenses because it is comparatively large - often compared to sales revenue to indicate the relationship between the selling price and its cost.
What can fall into the category of Other revenues and expenses?
revenues and expenses from activities that are not central to a company's operations. "one shot transactions"
What is the statement of stockholders equity?
Explains the changes in stockholders equity accounts (contributed capital and retained earnings) over a period. Represents a summary of the activity in the accounts that keep track of the shareholder's investment in the company.
What is the statement of cash flows? What does it reflect? How is it divided?
Summary of the activity in a company's CASH account over a period of time. Ceartain transactions entered into by a company increase the cash account, others decrease it. The SCF summarizes these transactions and expains how the cash balance @ the beginning of the period came to be the cash balance at the end of the period. SCF is divided into 3 categories - operating activites, investing activites, financing activities. The transactions summarized in each of these categories either increase or decrease cash during the period and hte net result explains the change in the overall cash balance.
What make up cash flows from operating activities?
cash inflows and outflows associtated with the acquisition and sale of a company's products and services - dollar amounts do NOT necessarily agree with the dollar amounts appearing for these items on the income statement -- only records CASH inflows and outflows - just one of the company's many assets.
What activities make up cash flows from investing activities?
cash inflows and outflows associated with the purchase and sale of a company's investments.
What activities make up cash flows from financing activities?
include cash in/out flows associated with a company's two sources of outside capital: liabilities and contributed capital.
What are current liabilites?
Obligations expected to be paid (or services expected to be performed)with the use of assets listed in the current asset section of the balance sheet. (examples include: accounts payable, wages payable, interest payable, short term notes payable, income taxes payable, current maturities on long term debts, deferred revenues)
What are long term liabilites?
Obligations expected to require payment over a period of time beyond the current year. These obligations are usually evidenced by formal contracts that state their principal amounts, periodic interest payments and maturity dates. (examples: long term notes payable, bonds payable, mortgage payable).
What are the two parts of the stockholders equity section of the balance sheet?
Contributed capital - measure of the assets contributed directly ot the company by its owners. Contribution is exchanged of ownership interest (shares of stock).note: purchase and sale of ownership interests have no effects on the BS.
Retained Earnings - measure of the assets that have been generated thru a company's operating activities but not paid out to stockholders in the form of dividends. (not a tangible pool of cash - simply a measure of hte amount of the assets appearing on the balance sheet that hve been provided by profitable operations)
What is the formula for determining retained earnings?
RE(eb)=RE(bb)+Revenues-Expenses-Dividends
Explain the differences between a corporation and a partnership or proprietorship.
A corporation is a legal entity that is separate and distinct from its owners. Can be taxed, sued, and hte owners are legally liable only for the amount of their ORIGINAL contributions to the corporation. Stockholders aquire ownership interests by purchasing shares of stock in the corporation. Asset distributions are made on a per share basis and are called dividends.
A Partnership (or proprietorship) is not a legal entity - It can neither be taxed nor sued and the legal liability of the owners (called partners or proprietors)is not limited to their original contributions. Asset distributions to partners are called withdrawls.
What is reported on the income statement and what does it measure?
Consists of Operating revenues, operating expenses and other revenues and expenses. It measures operating performance over a particular period - the activities associated wiht the acquisition and sale of a company's inventories or services.
What are operating revenues?
represent the inflow of assests (or decrease in liabilites) due to a company's operating activities -- sales and fees earned.
Define sales
Most common revenue account, represents a measure of asset increases (cash or accounts receivable) due to selling a company's products or other inventories). Fees Earned, Service Revenue.
Cost of goods sold (COGS)account
represents the original cost of the inventory items (purchase price or cost of manufacture) that are sold to generate sales revenue. For MFG. companies inventory expense is usually separated out form other operating expenses because it is comparatively large - often compared to sales revenue to indicate the relationship between the selling price and its cost.
What can fall into the category of Other revenues and expenses?
revenues and expenses from activities that are not central to a company's operations. "one shot transactions"
What is the statement of stockholders equity?
Explains the changes in stockholders equity accounts (contributed capital and retained earnings) over a period. Represents a summary of the activity in the accounts that keep track of the shareholder's investment in the company.
What is the statement of cash flows? What does it reflect? How is it divided?
Summary of the activity in a company's CASH account over a period of time. Ceartain transactions entered into by a company increase the cash account, others decrease it. The SCF summarizes these transactions and expains how the cash balance @ the beginning of the period came to be the cash balance at the end of the period. SCF is divided into 3 categories - operating activites, investing activites, financing activities. The transactions summarized in each of these categories either increase or decrease cash during the period and hte net result explains the change in the overall cash balance.
What make up cash flows from operating activities?
cash inflows and outflows associtated with the acquisition and sale of a company's products and services - dollar amounts do NOT necessarily agree with the dollar amounts appearing for these items on the income statement -- only records CASH inflows and outflows - just one of the company's many assets.
What activities make up cash flows from investing activities?
cash inflows and outflows associated with the purchase and sale of a company's investments.
What activities make up cash flows from financing activities?
include cash in/out flows associated with a company's two sources of outside capital: liabilities and contributed capital.
List the four basic assumptions of financial accounting.
economic entity, fiscal period, going concern, stable dollar.
What is th economic entity assumption?
Profit seeking entities, which are seperate and distinct from their owners and other entities, can be identified and measured.
What is the fiscal period assumption?
States that the operating life of an economic entity can be divided into fiscal periods over which the performance and financial position of the entity can be measured.
What is the going concern assumption?
the assumption that the entity will continue to exist beyond the end of the current fiscal period - the life of entity will continue into the foreseeable future.
What is the stable dollar assumption?
The performance and financial position of the entity can be measured in terms of a monetary unit that maintains constant purchasing power across fiscal periods.
What is inflation?
the steadily decreasing purchasing power of the dollar over time.
What are relevant economic events?
have economic significance to a particular company and include any occurrenece that affects its financial condition. (signing of new labor agreement, hiring of new CEO, sale of an item of inventory, payment of monthly wages...)
What is the fundamental accounting equation?
Assets= Liabilites + Stockholders' Equity

keep in mind errors can exist even if the accounting equation balances.
Describe what assets are and where they come from. What are some examples?
Items and rights that a company acquires thru objectively measureable transactions that can be used in the future to generate economic benefits. They come from 3 categories: borrowed, contributed by stockholders, generated by operating activities. They include cash, securities, receivables from customers, land, buildings, machinery, equipment, rights such as patents, copyrights, trademarks.
Describe what liabilities are and how they relate to assets.
Consist primarily of a company's debts or payables. They are exisiting obligations for which assets must be used in the future. The dollar amount of the total liabilites on the balance sheet represents the portion of the assets that a company has borrowed and must repay.
What is Stockholders' Equity?
Consists of two components: contributed capital - the dollar value of the assets contributed by stockholders and retained earnings - the dollar value of hte assets generated by operating activities and retained in the business.

Assets= Liabilites + contributed capital + retained earnings
How are business transactions recorded?
Each business transaction (exchange of asset or liablility between companies) is recorded in the books so that the dollar values of a company's assets always equal the dollar values of its liabilities and stockholders' equity.