Accounting Chapter 2 Flashcards

Questions and Answers

What does the balance sheet report?

It shows the financial position of a company on a particular date. It reports assets, liabilities, and stockholders' equity of a company.

What is the balance sheet equation?

Assets = Liabilities + Stockholders' Equity

What does the term 'consolidation' mean when referring to a firm's financial statements?

When a company (parent) owns more than 50% of the voting stock of another company (subsidiary), it reports as one entity.

Why is it important for companies to report comparative data on their financial statements?

It allows users to analyze changes and trends over time. Signup and view all the answers

How many years of data are required to be shown on the balance sheet?

Two years are required. Signup and view all the answers

How many years are required to be shown on the income statement?

Three years are required. Signup and view all the answers

What is accounts receivable?

Accounts Receivable is an asset account representing credit sales. Signup and view all the answers

What is the allowance for doubtful accounts?

It's an estimate of the amount a company expects it will not collect from accounts receivable. Signup and view all the answers

The allowance account has no effect on a company's earnings.

False Signup and view all the answers

What is property, plant, and equipment (PP&E)?

PP&E refers to long-term assets like fixed assets or tangible assets. Signup and view all the answers

What is depreciation?

Depreciation represents the allocation of an asset's cost over its useful life. Signup and view all the answers

What is accumulated depreciation?

Accumulated depreciation represents the total amount of depreciation expense taken on an asset. Signup and view all the answers

How is property, plant, and equipment (PP&E) reported on the balance sheet?

PP&E is reported net of accumulated depreciation. Signup and view all the answers

Why is the valuation of inventories important in financial reporting?

Inventories are a significant proportion of a company's assets. Signup and view all the answers

Study Notes

Balance Sheet Overview

The balance sheet shows a company's financial position at a specific date, detailing assets, liabilities, and stockholders' equity.
Balance Sheet Equation: Assets = Liabilities + Stockholders' Equity, illustrating what the company owns versus how resources are financed.

Consolidation of Financial Statements

Consolidation occurs when a parent company owns over 50% of a subsidiary's voting stock, allowing them to report as a single entity.
Parent companies merge financial information of subsidiaries to reflect total control and ownership in financial statements.

Importance of Comparative Data

Reporting comparative data over multiple years is crucial for analyzing trends and changes in financial performance.
A balance sheet requires two years of data, while an income statement requires three years for meaningful comparison.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts Receivable (A/R) represents cash expected to be collected from credit sales; it is an asset account.
Companies estimate uncollectible amounts, known as bad debt, which is recorded in the Allowance for Doubtful Accounts (ADA), affecting net A/R reported on the balance sheet.

Impact of Allowance on Earnings

Estimating bad debt increases the allowance account and Bad Debt Expense, reducing overall earnings for the period.
The increase in ADA corresponds to a decrease in expected cash collections, impacting the income statement.

Property, Plant, and Equipment (PP&E)

PP&E consists of long-term, tangible assets used in operations, not consumed within a single year, often classified as fixed assets.

Depreciation and Accumulated Depreciation

Depreciation allocates the cost of tangible assets over their useful lives, reflecting the expense associated with using the asset.
Accumulated Depreciation is the cumulative total of depreciation taken on an asset, representing its diminished value.

Reporting PP&E on Balance Sheet

PP&E is reported net of accumulated depreciation: Total original cost of PP&E - Accumulated Depreciation = PP&E, net.
Detailed breakdowns may be included in financial statement notes, categorizing multiple long-term assets.

Valuation of Inventories

Inventory valuation is critical as it constitutes a significant portion of a company's assets, impacting financial health and reporting accuracy.

Description

Test your knowledge of Accounting Chapter 2 with these flashcards. Covering essential concepts such as the balance sheet and its equation, this quiz helps reinforce your understanding of key financial principles.