Chapter 1 Review-Financial Accounting

What is are the four primary financial statements?

Income Statement, Statement of Stockholder's equity, Balance Sheet, Statement of Cash Flows

What is the purpose of the balance sheet?

Summarizes the changes in stockholders' equity from net income, dividends, and stock issuances during an interval of time.

What is the purpose of the statement of stockholders' equity?

Summarizes the changes in stockholders' equity from net income, dividends, and stock issuances during an interval of time.

What does it mean to say that the income statement, statement of stockholders' equity, and statement of cash flows measure activity over an interval of time, but the balance sheet measures activity at a point in time?

Balances of accounts reported in the income statement, statement of stockholders' equity, and statement of cash flows reflect activity from the beginning of the period through the end of the period. Balances of accounts reported in the balance sheet reflect the financial position of the company as of a single date, the end of the period.

What is the purpose of the statement of cash flows?

Cash activities related to operating, investing, and financing activities during an interval of time.

Financial accounting and reporting standards in the United States are established primarily by the a. Securities and Exchange Commission (SEC). b. Financial Accounting Standards Board (FASB). c. International Accounting Standards Board (IASB). d. The U.S. Congress.

Financial Accounting Standards Board (FASB).

What are some of the benefits to obtaining a degree in accounting? What is the difference between a career in public accounting and private accounting? What are some of the traditional careers of accounting graduates? What new areas are accountants expanding into?

The benefits to obtaining a degree in accounting include a wide variety of job opportunities, high demand, and high salaries. Public accounting firms are professional service firms that traditionally have focused on three areas: auditing, tax preparation/planning, and business consulting. Private accounting means providing accounting services to the company that employs you. Traditional careers include auditor, tax preparer, consultant, and basic accounting services. Accountants are now expanding to work as financial analysts, forensic accountants, tax lawyers, FBI agents, and many others.

5. Sales of products or services are referred to as a. Assets. b. Revenues. c. Liabilities. d. Expenses.

b. Revenues.

Which financial statement shows that a company's resources equal claims to those resources? a. Income statement. b. Statement of stockholders' equity. c. Balance sheet. d. Statement of cash flows.

c. Balance sheet.

Amounts owed by the company are referred to as (LO1-2) a. Expenses. b. Dividends. c. Liabilities. d. Assets.

c. Liabilities.

What is a benefit to a career in accounting? a. High salaries. b. Wide range of job opportunities. c. High demand for accounting graduates. d. All of these answer choices are correct.

d. All of these answer choices are correct.

4. Resources of a company are referred to as a. Liabilities. b. Stockholders' equity. c. Dividends. d. Assets.

d. Assets.

Financial accounting serves which primary function(s)? a. Measures business activities. b. Communicates business activities to interested parties. c. Makes business decisions on behalf of interested parties. d. Both a. and b. are functions of financial accounting.

d. Both a. and b. are functions of financial accounting.

The body of rules and procedures that guide the measurement and communication of financial accounting information is known as a. Standards of Professional Compliance (SPC). b. Code of Ethical Decisions (COED). c. Rules of Financial Reporting (RFP). d. Generally Accepted Accounting Principles (GAAP).

d. Generally Accepted Accounting Principles (GAAP).

What is meant by GAAP? Why should companies follow GAAP in reporting to external users?

GAAP refers to Generally Accepted Accounting Principles, or the rules of financial accounting. The fact that all companies use the same rules is critical to financial statement users, because it allows them to accurately compare financial information among companies when they are making decisions about where to lend or invest their resources.

What are the major advantages and disadvantages of each of the legal forms of business organizations? Spiceland, J. David. Financial Accounting (p. 36). McGraw-Hill Higher Education. Kindle Edition.

The major advantage of a corporation is limited liability. Stockholders of a corporation are not held personally responsible for the financial obligations of the corporation. Owners of sole proprietorships or partnerships remain personally liable for activities of the business. Corporations have the disadvantages of double taxation compared to sole proprietorships and partnerships. Sole proprietorship and partnership forms of business is that income is taxed only once. However, there could be other tax advantages for certain types of corporations, such as a lower overall tax rate.

Identify some of the people interested in making decisions about a company.

Those interested in making decisions about a company include investors, creditors, customers, suppliers, managers, employees, competitors, regulators, tax authorities, and local communities.

What is the basic difference between financial accounting and managerial accounting?

Financial accounting seeks to measure business activities of a company and to communicate those measurements to external parties for decision-making purposes. The two primary external, or outside the firm, users of financial accounting information are investors and creditors. Managerial accounting deals with the methods accountants use to provide information to an organization's internal users, that is, its own managers.

What is the purpose of an income statement?

Reports the company's revenues and expenses during an interval of time. If revenues exceed expenses, then the company reports net income. If expenses exceed revenues, then the company reports a net loss.

What is the accounting equation? Which financial statement reports the accounting equation?

The accounting equation is: Assets = Liabilities + Stockholders' Equity. The format of the balance sheet follows the accounting equation.

Which financial statement conveys a company's ability to generate profits in the current period? a. Income statement. b. Statement of cash flows. c. Balance sheet. d. Statement of stockholders' equity.

a. Income statement.

A company reports the following in its income statement: Total revenues of $500,000 and total expenses of $300,000. Which of the following is true? a. Net income equals $200,000. b. Total dividends equal $200,000. c. Total assets equal $200,000. d. Total stockholders' equity equals $200,000.

a. Net income equals $200,000.

What are the two fundamental qualitative characteristics identified by the Financial Accounting Standards Board's (FASB) conceptual framework? a. Relevance and faithful representation. b. Materiality and efficiency. c. Comparability and consistency. d. Costs and benefits. .

a. Relevance and faithful representation.

Financial accounting can also be described as a way to a. Tell the financial story of a company. b. Calculate the amount of taxes owed to the government. c. Determine employee satisfaction with their work environment. d. Measure the personal net worth of stockholders.

a. Tell the financial story of a company.

Based on the introductory section of this chapter, which course is most like financial accounting? a. College algebra. b. Foreign language. c. Molecular biology. d. Physical education.

b. Foreign language.

Why does financial accounting have a positive impact on our society? a. It entails a detailed transaction record necessary for filing taxes with the Internal Revenue Service (IRS). b. It allows investors and creditors to redirect their resources to successful companies and away from unsuccessful companies. c. It prevents competitors from being able to steal the company's customers. d. It provides a system of useful internal reports for management decision making.

b. It allows investors and creditors to redirect their resources to successful companies and away from unsuccessful companies.

A company reports the following in its balance sheet: Total assets of $800,000 and total liabilities of $700,000. Which of the following is true? a. Net income equals $100,000. b. Total expenses equal $1,500,000. c. Total revenues equal $1,500,000. d. Total stockholders' equity equals $100,000.

d. Total stockholders' equity equals $100,000.