Financial Statements Basics

which of the following is a liability (a) accounts payable, (b) inventory, (c) investments, (d) prepaid insurance, (e) none of the above

(a) accounts payable; a liability is an economic obligation of a firm. The only such obligation among the choices is accounts payable, which represents the total unsecured promises to pay for goods or services already received. Inventory, investments, and prepaid insurance are all economic resources of a firm, and are thus classified as assets

Goober Pyle purchased machinery for his auto shop at a cost of $5,000 with a note from the bank. Accordingly (a)liabilities increased $5K and assets increased $5K, (b) liabilities increased $5K and owners' equity decreased $5K,(c) assets and owners' equity both increased $5K, (d) none of the above

(a) liabilities and assets increased $5K; purchasing equipment with a note increases equipment (an asset) and notes payable (a liability) by $5K each

The financial position at the end of a period is reflected on the (a) income statement, (b) balance sheet, (c) statement of retained earnings, (d) none of the above

(b) balance sheet

The cash account includes (a) cash on hand, (b) checks on hand that have been deposited, (c) cash in the bank, (d) all of the above

(d) all of the above

Which of the following is a liability (a)cash, (b) accounts receivable, (c) inventory, (d) none of the above

(d) none of the above

which of the following is an asset (a) salaries payable, (b) taxes payable, (c) accounts payable, (d) none of the above

(d) none of the above

owner's equity can also be shown on the balance sheet as (a) net worth, (b) net assets, (c) stockholders' equity, (d) A & B, (e) A, B, & C

(e) A, B, and C; owners' equity represents the residual claim of the owners of a firm against the assets of the firm; that is, after creditors have made their claim to the assets they have financed, what remains for the equity holders? Net worth, net assets, and stockholders' equity are all descriptive of the same thing.

which of the following is a snapshot of the financial position of the company (a) income statement, (b) statement of retained earnings, (c) cash flow statement, (d) inventory statement, (e) none of the above

(e) none of the above (this is the balance sheet)

You receive payment from a debtor. Which increases and decreases in Assets = Liabilities + Owners' Equity

Assets both increase and decrease.This is a simultaneous increase and decrease in assets - you are receiving cash and at the same time you are surrendering your account receivable

You make a cash settlement of an account payable. Which increase/decrease? Assets = Liabilities + Owner's Equity

Assets decrease, Liabilities decrease

You purchase supplies on account which increases and decreases in Assets = Liabilities + Owner's Equity

Assets increase and liabilities increase. If this was purchased with cash and not on an account assets would have increased and decreased

You get a loan at a local bank. Which increase decrease in Assets = Liabilities + Owner's Equity

Assets increase, Liabilities increase

The collection of an account receivable generates cash, which implies an increase in assets T/F

False

prepaid items have already been converted to cash and therefore are the most liquid items in the current assets portion of the balance sheet T/F

False

An asset is only a tangible, economic resource of a firm that can be measured in monetary terms T/F

False; Assets need not be tangible, as long as they are measurable in monetary terms. An example of an intangible asset is a patent

The statement of financial position (balance sheet) shows how well a company has performed over a period of time T/F

False; The balance sheet lists a company's assets, liabilities, and owner's equity. While it is possible to gather a general idea about the financial performance of a company from the statement of financial position it is difficult to tell over what time period this took place. The income statement is used explicitly for this purpose

Assets = Liabilities + owner's equity

Foundation on which all accounting concepts are based is this equation the basis for double entry bookkeeping an increase in assets must be balanced by an equal and offsetting increase in liabilities or equity or decrease in other assets

current liabilities

Includes income tax payable, interest payable, wages payable, accrued rent payable, accrued salaries, trade payables

balance sheet

The snapshot of the business. Reports the financial position of an enterprise at a point in time. Any increase in assets, liabilities, or equity would flow through to the balance sheet

For accounting purposes, depreciation is an expense allocation scheme T/F

True

examples of assets

accounts receivable, prepaid insurance, cash, inventory, plant & equipment, investment, office supplies, prepaid expenses, accrued interest receivable

Financial reporting consists of

balance sheets and income statements (the retained earnings statement is also required)

examples of liabilities

bonds payable, accounts payable,

expenses

cost of good sold, operating expenses, interest, and taxes

the statement of changes in owner's equity shows the revenues, expenses, and net income of an enterprise over a period of time T/F

false; statement of changes in owner's equity shows the retained earnings at the beginning of the period, plus net income, less dividends. Finally the ending retained earnings are shown

current assets almost always equal current liabilities t/f

false; the resources of an organization are composed of current and noncurrent assets. The claims on those assets are current and noncurrent liabilities, as well as the equity of the owners. In total, assets must equal liabilities plus equity; however, the components of each side of the equality need not be equal since an increase in current assets could be financed by an increase in current liabilities, noncurrent liabilities or owners' equity. Because current assets and current liabilities are independent, they need not be equal

Income statement

focuses on the static position of the company at a point in time. Reports the results of operations for a firm for a short period of time. "how well the firm has performed" prepared on an accrual basis

long term liabilities example

notes payable, mortgage payable

asset

probable future benefits obtained or controlled by a particular entity as a result of past transactions or events Scarce - can be useful for carrying out economic activites

statement of changes in owner's equity

reports the increases in capital, plus additional investments, net income (minus net loss), less drawing

accrual basis

revenues are recognized when earned not received expenses recognized when incurred not paid

liability

the debts of an enterprise the claims by creditors on the resources (assets) of a firm

owners' equity

the residual claim of the owners assets of a firm "residual" = creditors have a legal priority to the claims on assets

Liabilities =assets - owner's equity T/F

true; assets = liabilities + owner's equity or liabilities = assets - owner's equity or owner's equity = assets - liabilities

depreciation can be considered an allocated cost of using an asset with a life more than one year T/F

true; depreciation is a process of systematically and rationally allocating the cost of an asset over its useful life. It is a good example of the matching principle, in which expenses are recognized in the periods that they will provide benefit to the firm

stockholders' equity is the same as owners' equity T/F

true; in a corporation, stockholders are the owners of the firm; thus, the terms stockholders' equity and owners' equity are synonymous. Other forms of business enterprises include proprietorship and partnerships. Because a proprietorship is owned entirely by a single individual, the owners' equity is also called proprietors' capital. A partnership is a business owned jointly by two or more individuals with the goal of making a profit, and the equity in a partnership is often called partner's capital

liabilities are the claims of creditors to a company's resources T/F

true; liabilities are the debts or obligations of an enterprise. A company's resources (assets) can be funded through debt or equity or a combination of the two. Liabilities can be long term, like bonds payable or a mortgage payable, or they can be current in nature, like accrued wages or accounts payable

the "net worth" of a firm is shown on the company's balance sheet t/f

true; the term net worth is synonymous with owners' equity; thus it is reported on a company's balance sheet. In contemporary accounting parlance, equity is the preferred title. Net worth is considered an outdated title, although it is still frequently seen