Chapter 2 Accounting Equation

1. What does the Disclosure of Important Information not Recognized in the Statements? 2. Two organizations that require Supplmental Information 3. What are the two reason why external audits are conducted? 4. What are the four test that external auditors conduct?

1. If the company is a defendant in a lawsuit but the outcome is unclear the company must report the existence of the lawsuit 2. SEC and FASB 3. a. Determine whether the financial statements reflect the financial status of the company b. Determine whether Generally Acceptable Accounting Practices we're used 4. a. Look at key transaction original documents b. Spot check that reported inventory exist c. Contact a sample of customers and suppliers to ensure sales and purchases reported by company d. Looking over procedures to make sure accounting records are properly maintained

1. Comparability 2. Consistency 3. Materiality 4. Conservatism

1. Information that becomes much more useful when it can be compared to a benchmark or standard 2. Once you adopt an accounting principle continue to follow it 3. Whether an item is large enough to make a difference to anyone 4. Recognize all losses and not gains

1. Notes to financial statement 2. Recognition 3. Disclosure 4. What two "organizations" require supplementary information?

1. Integral part of financial statement. Provides additional information pertaining to a company's operations and financial position 2. summarize the complexity of an event in ONE SINGLE NUMBER which is then entered into the accounting system 3. It's a way to convey information when it is uncertain or you're not able to convey it in one number 4. SEC (Securities and Exchange Commission) and the FASB (Financial Accounting Standards Board)

1. Articulation 2. The Statememt of Cash Flow explains what about the Balance sheet? 3. What 2 things show the change in retained earnings on the balance sheet? 4. Cash from operations on the statement of cash flow is transformed into ___________ ________ through the accounting adjustments applied to the raw cash flow data.

1. The three financial statements are not isolated numbers but are an integrated set of reports that gives a look at the company's financial status. 2. Why the Balance sheet changed from the beginning of the year to the end of the year. 3. The income statement and the dividends declared for the year 4. Net income

1. Net assets 2. What are the 4 main areas that must be covered in the financial statement notes? (SADS) 3. What is within the Summary of Significant Aacounting Policies 4. What is the purpose of having the Additional Information about Summary Totals?

1. Total assets - total liabilities 2. Summary of significant accounting policies : Additional information about summary totals : Disclosure about information not recognized : Supplementary information 3. GAAP allows firms to make choices about financial statements, GAAP requires those choices to be noted 4. If there is a payable account, the company would list all of the loans and their amounts

Assets are listed in the order of liquidity 1. What is liquidity? What is the order of liquidity? 2. - inventory - marketable investments (company can quickly convert short-term investments into cash) - long term investments, fixed assets, and intangibles - cash - accounts receivable

1. amount of time it would take to convert an asset into cash 2. - cash - marketable investments (company can quickly convert short-term investments into cash) - accounts receivable - inventory - long term investments, fixed assets, and intangibles

1. What is the accounting equation? 2. Income statement 3. Equation for net income 4. Revenue

1. assets = liabilities + equity 2. net income of a company (financial performance) for a specified period of time 3. net income = revenue - expenses 4. amount of assets created through the sale of goods and/or services

1. Expenses 2. Gains 3. Losses 4. Net income (What is net income and net loss)

1. assets consumed from the performance of business operations 2. money made on activities outside the normal business of a company 3. money lost on activities outside the normal business of a company 4. the difference between revenues and expenses, net income = revenue > expenses, net loss = expenses < net income

1. How are assets listed on the balance sheet? 2. How are liabilities listed on the balance sheet? 3. What is the format of the balance sheet? 4. What does "current" mean when talking about assets and liabilities?

1. by the ease of liquidity - most liquid is on top 2. liabilities are listed by their due date - shortest on the top 3. Assets (listed first): current assets (more liquid) and long-term assets Liabilities (after assets): current liabilities then long-term liabilities Owner's equity: paid-in capital then retained earnings 4. consumed or paid within 1 year

1. Statement of Cash Flows 2. Operating Activities 3. Investing Activities 4. Financing Activities

1. cash flow items classified as operating, financing, or investing 2. activities involved in producing and selling goods and services during the day-to-day business of the company 3. The purchase or sale of long-term assets such as land, buildings, equipment, or buying or selling stock of other companies 4. Activities whereby cash is obtained from, or repaid to, owners and creditors

Analyze a statement of cash flows to identify operating, investing, and financing activities 1. mortgage payable 2. common stock and additional paid-in capital (cash received from stockholders) 3. examples: property, plant, and equipment 4. operating expenses (cash paid for rent)

1. financing activities 2. financing activities 3. investing activities 4. operating activities

Analyze a statement of cash flows to identify operating, investing, and financing activities 1. Examples: cash paid for equipment and cash paid for investments (stocks, loans) 2. retained earnings (cash going back into business)

1. investing activities 2. financing activities

Analyze a statement of cash flows to identify operating, investing, and financing activities 1. all categories that are on the income statement, and all current assets and liabilities 2. long term assets 3. examples: sales (cash received from customers); cost of goods (cash paid for inventory) 4. long term liabilities and equity accounts

1. operating activities 2. investing activities 3. operating activities 4. financing activities

1. Stockholder's equity 2. Paid in capital 3. Retained earnings 4. Treasury stock

1. portion of the balance sheet that represents the capital received from investors in exchange for stock (paid in capital), donated capital, and retained earnings 2. investor gives assets in exchange for company stocks 3. cumulative earnings that have been retained in the business 4. when the company buys back its own shares from the investor

1. Earnings per share 2. Time period 3. Revenue recognition

1. tells the owner of one share of stock what he or she really wants to know, if you purchased one share at $14 and the company makes $5 billion you own 14$ of the $5 billion 2. a company needs to report its financial results of its activities over a standard time period (monthly, quarterly, annually) 3. generally accepted accounting principles that determine the specific conditions in which revenue is recognized

1. Accumulated other comprehensive income 2. Entity concept 3. Historical cost convention 4. Going Concern Assumption

1. the source of increased assets, a company may experience an increase or decrease in equity due to changes in market price or exchange rates 2. personal financial activity is kept separate from business financial activity 3. For balance sheet purposes assets are listed at the price paid at time of acquisition 4. allows the readers of the financial statement to assume that the company will continue long enough to carry out its objectives and commitments

1. Balance sheet 2. Liabilities 3. Assets 4. Owner's equity

1. A statement of financial position at a particular point in time, shows the assets, liabilities, and owner's equity 2. obligations that will require future economic sacrifices in the form of the transfer of an asset or providing a service 3. economic resources, probably future economic benefits obtained or controlled by the entity 4. portion of the assets that the owners can call their own if all of the liabilities were paid off

1. External audits 2. Relevance 3. Reliability 4. Book value of an asset

1. Audit conducted by external (independent) qualified accountants 2. Information that is timely and useful and capable of impacting a decision 3. Information that is verifiable and you can depend on it 4. Assets cost - assets accumulated depreciation