Quiz 1

Tom's Auto has $500,000 in total assets and $375,000 in total liabilities. How much is its total stockholders' equity?

$125,000

Somewhat Safe Climbing Gear has been in business for many years. On its Balance Sheet as of 12/31/18, the company reported Retained Earnings of $10,000. During the next year of operations, the company reported $25,000 of Net Income and declared and issued $5,000 in cash dividends. What would be the ending balance of Retained Earnings as of 12/31/19?

$30,000

Air BnDorm has $900,000 in Total Assets and $400,000 in Total Stockholders' Equity. How much does it have in Total Liabilities?

$500,000

Sketchy Investments has total stockholders' equity of $25,000 and total assets of $740,000. How much is its total liabilities?

$715,000

A Chinese Restaurant, Wok this Way, has total stockholders' equity of $50,000 and total assets of $125,000. How much are its total liabilities?

$75,000

After its first year of operations, Athena Airlines reports Net Income of $10 million. It also declares and issues a cash dividend of $2 million to its shareholders. What is the ending balance of Athena Airlines' Retained Earnings account?

$8 million

List 4 different users of Financial Accounting information.

1. Board of Directors 2. Investors 3. Creditors 4. Government

What are the three primary sections of the Statement of Cash Flows?

1. Cash flow provided (or used) by operating activities 2. Cash flow provided (or used) by investing activities 3. Cash flow provided (or used) by financing activities

List several methods through which companies disclose financial information.

1. Conference call 2. Press release to announce the company's earnings 3. Submitting the financial statements as part of a required filing

What are the four major financial statements?

1. Income statement 2. Balance sheet 3. Statement of cash flows 4. Statement of stockholder's equity

What did the Sarbanes-Oxley Act do?

1. Require the CEO and CFO to sign the financial statements 2. Provide stiffer criminal penalties for accounting fraud 3. Prohibit auditors from performing some types of nonaudit services to audit clients 4. Create the PCAOB to regulate the audit industry 5. Require firms to issue a report on the effectiveness of their internal controls (and the auditor must also issue a report on this)

Tito pays $2 million for a 20% ownership stake in SnapTweetTumbleBook. How might Tito make money?

1. The shares of SnapTweetTumbleBook increase in value and Tito then sells the shares. 2. SnapTweetTumbleBook pays dividends to Tito.

When a company declares and issues a cash dividend, what is the effect on the financial statement?

1. Total Stockholders' Equity decreases (because Retained Earnings decreases). 2. Total Assets decreases (because Cash decreases).

List the various types of opinions an external auditor might issue after being engaged to audit the financial statements of a company.

1. Unqualified opinion 2. Qualified opinion 3. Adverse opinion 4. Disclaimer of opinion

Which of the following are true? Your friend creates a new company called CloudPro in the technology industry. After its first year of its operations, the company's cash flow from operating activities is negative, its cash flow from investing activities is negative, and its cash flow from financing activities is positive. A) This is normal for a startup. B) This is abnormal for a startup and may be indicative of accounting fraud. C) This is abnormal for a startup and may be indicative of an impending bankruptcy.

A

What is a liability?

A probable future sacrifice of economic resources arising from a present obligation.

What is a 10K?

A report, filed annually with the SEC, that contains a company's financial statements and the accompanying notes.

What is an external auditor?

A third party (not an employee of the company being audited) that is hired to provide an opinion as to whether a company's financial statements have been fairly presented.

Sarbanes-Oxley Act did which of the following? (State all letters which apply). A) Created the Public Company Accounting Oversight Board (PCAOB). B) Required publicly-traded companies to assess the effectiveness of their internal controls and issue a report on their effectiveness. C) Prohibited audit firms from providing some non-audit services to audit clients. D) Created the Financial Accounting Standards Board (FASB).

A, B, C

Which of the following are true? A) The Balance Sheet is a snapshot of the company at a specific point in time, whereas the Income Statement is over a period of time. B) A company can raise money with debt or equity. C) An investor can make money by selling their ownership interest in the future for more than they paid, or by receiving dividends. D)Revenues are inflows or reductions of assets or enhancements of liabilities from providing goods or services related to the company's core business operations.

A, B, C

Which of the following are true? Double-entry accounting is: A) A system of bookkeeping that requires at least 2 different accounts to be recorded simultaneously. B) The foundation for Financial Accounting as it is used today. C) A system of bookkeeping that requires debits and credits to be in equal amounts.

A, B, C

Which of the following are true? a) Investors use financial accounting information when determining whether to invest in a company. b) Creditors use financial accounting information when determining whether to lend money to a company. c) Executives' compensation is often linked to the numbers in the financial statements. d) Publicly-traded companies must prepare financial statements, per SEC reporting requirements. e) Private companies do not usually prepare financial statements, since they don't have to register with the SEC or comply with SEC reporting requirements.

A, B, C, D

Which of the following are activities performed by the SEC? A) Serves as the regulator for publicly-traded companies in the U.S. B) Creates the accounting standards for publicly-traded companies in the U.S. C) Takes legal action against firms that engage in fraudulent financial reporting. D) Receives financial reports (10-K, 10-Q, etc.) from publicly-traded companies.

A, C, D

Which of the following are true? A) Publicly-traded companies must file quarterly and annual reports with the SEC. B) Financial accounting must comply with the tax code. C) The IASB is trying to create a single set of accounting rules that will be followed by all countries. D) "GAAP" stands for Generally Accepted Accounting Principles.

A, C, D

After its first year of operations, CloudBooks reports a Net Loss of $50 million. If you looked at CloudBooks' Balance Sheet on the last day of its fiscal year, you would see ____________ of $50 million.

Accumulated Deficit

Naked and Afraid Jungle Adventures has been in business for many years. On its Balance Sheet as of 12/31/18, the company reported Retained Earnings of $40,000. During the next year of operations, the company reported a $70,000 Net Loss and did not declare or issue any dividends. If you looked at the Stockholders' Equity section of the company's Balance Sheet as of 12/31/19 you would see _________ of __________.

Accumulated Deficit, $30,000

What is Accounts Receivable?

Amounts owed by customers from sales the company made on credit. This is an asset.

Cash, Accounts Receivable, and Inventory are all types of _________.

Assets

The amounts on the ____________ are measured as of a specific point in time, whereas the amounts on the Income Statement refer to a specific period of time.

Balance sheet

Which of the following statements are true? A) All companies in the United States are required to file audited financial statements with the SEC. B) All large companies in the United States are required to file audited financial statements with the SEC. C) All publicly-traded companies in the United States are required to file audited financial statements with the SEC.

C

What are some examples of asset accounts?

Cash, Short-term Investments, Accounts Receivable, Inventory, Prepaid Insurance, Prepaid Rent, Long-term Investments, Intangible Assets (Trademark, Copyright, Patent, Goodwill), Property, Plant, and Equipment (Truck, Building, Machine)

Assume you start a company by inventing a service called Imaginary Friend that will like all of your social media posts, text you funny stories, and poke you on Facebook. Shockingly, a bank lends ten million dollars to Imaginary Friend on the condition that the bank receives annual interest payments at a rate of 7%, with the ten million dollar principal to be fully repaid five years from today. The ten million dollars Imaginary Friend received represents which type of capital?

Debt capital

Assume you start a company by inventing a product called Lazy Drone that doesn't do anything except watch YouTube all day and eat pickles. Surprisingly, an investor gives your Lazy Drone ten million dollars in exchange for a 40% ownership interest. The money Lazy Drone received from the investment represents which type of capital?

Equity capital

Your friend is creating a company and needs to raise money. She could raise money with which type(s) of capital?

Equity capital or debt capital

Which nonprofit organization is responsible for overseeing the activities of the FASB?

FAF (Financial Accounting Foundation)

Which nonprofit organization has been delegated the responsibility of making accounting standards in the United States?

FASB (Financial Accounting Standards Board)

True or False: A company's revenues and expenses in its financial accounting reports should be identical to the revenues and expenses reported on the company's tax return; otherwise, the company is probably committing fraud.

False

True or False: Double-entry accounting is the use of two sets of books, one for the auditors and one for managers.

False

True or False: Double-entry accounting was created by the Securities and Exchange Acts of 1933 & 1934.

False

True or False: Financial Accounting, Managerial Accounting, and Tax are similar in that they all are determined by the Financial Accounting Standards Board.

False

True or False: Financial Accounting, Managerial Accounting, and Tax are similar in that they all follow GAAP.

False

True or False: Financial Accounting, Managerial Accounting, and Tax are similar in that they all were mandated by the Securities and Exchange Acts of 1933 & 1934.

False

True or False: In response to the Great Depression, Congress created the FASB to begin issuing accounting standards.

False

True or False: One of the main reasons a company creates financial statements is so the company knows how much tax it needs to pay.

False

True or False: Prior to the creation of the SEC, companies doing business in the U.S. followed a common set of accounting standards.

False

True or False: Private companies doing business in the U.S. must follow the same GAAP that publicly-traded companies follow.

False

True or False: Publicly-traded companies in the U.S. usually embrace new accounting standards because the new standards improve the perception of investors and creditors that financial statements are of high quality.

False

True or False: The role of the Emerging Issues Task Force is to address areas of confusion in U.S. GAAP and issue an Accounting Standard Update to resolve the confusion.

False

True or False: When we talk about a company issuing "financial statements" what we mean is that the company is making its tax return public so investors and creditors can make informed decisions.

False

Which organization creates the accounting standards for companies in the U.S.?

Financial Accounting Standards Board (FASB)

For how long has accounting existed?

For thousands of years

What does GAAP stand for?

Generally Accepted Accounting Principles

What do we call the rules that govern financial reporting in the U.S.?

Generally Accepted Accounting Principles (GAAP)

What does IFRS stand for?

International Financial Reporting Standards

What is the audit committee and what does it do?

It is a subgroup of a company's board of directors that is responsible for hiring the company's external auditor, determining the auditor's compensation, and mediating disagreements between the auditor and the company's management. The audit committee must consist entirely of outside directors (aka independent directors); these are board members who do not have a material interest in the company. Thus, the CEO of the company cannot be a member of the audit committee.

What does the Statement of Stockholders' Equity show?

It shows how the stockholders' equity accounts changed over the period.

On the Income Statement, ___________ is equal to total revenues minus total expenses.

Net Income

AmaFlix goes public, offering 1,000 shares of stock to the public. People buy all 1,000 shares for the price of $21/share. As a result of this transaction, AmaFlix's total assets increase by $21,000 and its total stockholders' equity increases by $21,000. One month later, AmaFlix shares are trading for $34/share on the open market. Does the fact that investors are now trading the AmaFlix shares at a higher price affect AmaFlix's financial statements, assuming that AmaFlix itself is not issuing new shares or buying any of the shares available on the open market?

No

Walmart is a publicly-traded company headquartered in the U.S. but that does significant business internationally. When Walmart files a 10-K with the SEC, would it be acceptable for Walmart's financial statements to have been prepared according to IFRS?

No, must be prepared according to U.S. GAAP.

Is the external auditor's job to find fraud? If not, what is the role of the external auditor?

No. The role of the external auditor is to provide reasonable assurance as to whether the financial statements and notes are free from material misstatement.

Your company has just declared that it will pay $500,000 cash in dividends. What effect will this have on the company's Net Income?

None

Which organization advises the FASB regarding potential modifications to GAAP for private companies in the U.S.?

PCC (Private Company Council)

Which organization creates the auditing standards for audits of publicly-traded companies in the U.S.?

Public Company Accounting Oversight Board (PCAOB)

Dishonest Foods is a publicly-traded company in the U.S. that purposely overstated its revenue in its annual report. Dishonest Foods could get into trouble with the _________.

Securities and Exchange Commission (SEC)

What major event in history led to all publicly-traded companies being required to file audited financial statements with the SEC?

The Great Depression

If you were to examine the Statement of Cash Flows for a successful company that has been in business for many years (e.g., Walmart), what would you be likely to find regarding its cash flow from operating activities?

The company would generate positive cash flow from its operating activities.

Who typically is responsible for hiring a company's external auditor?

The company's audit committee

How are the Income Statement and the Balance Sheet connected?

The net income (or net loss) from the Income Statement affects the Retained Earnings account on the Balance Sheet.

What is financial accounting?

The preparation of financial statements and the accompanying notes for the use of external parties such as investors and creditors.

What does Retained Earnings represent?

The profits the company has accumulated since its formation, minus any dividends distributed to the company's shareholders.

On the Balance Sheet, what does the line item "Total Stockholders' Equity" tell you?

The residual that remains after subtracting total liabilities from total assets.

At the beginning of the year, Uber Unlicensed Dentists has an Accumulated Deficit of $40 million. Despite a number of lawsuits, the company posts a Net Income of $70 million for the year and declares and issues a $10 million dividend. How does this affect the Accumulated Deficit account?

There is no longer an Accumulated Deficit account. You would instead see a Retained Earnings account of $20 million in the Stockholders' Equity section of the Balance Sheet.

What is the role of the FASB?

To create accounting rules for nongovernmental organizations in the U.S. The FASB is the accounting standard-setter for the U.S.

What is the main purpose of the Statement of Cash Flows?

To show how and why the company's cash position changed over a period.

On the Balance Sheet, total assets are equal to __________.

Total Liabilities plus Total Stockholder's Equity

True or False: Double-entry accounting is the foundation for Financial Accounting as it is used today.

True

True or False: Financial Accounting, Managerial Accounting, and Tax are similar in that they all are types of accounting.

True

True or False: International Financial Reporting Standards tend to be more principles-based, whereas U.S. GAAP tends to be more rules-based.

True

True or False: When the FASB issues a new accounting standard, this is referred to as an Accounting Standards Update (ASU).

True

The PCAOB is responsible for creating _________ standards for _________ companies in the U.S.

auditing, publicly-traded

The top executives of a company must answer to the __________ of ___________.

board, directors