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Questions and Answers
What does the balance sheet report?
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?
What is the balance sheet equation?
Assets = Liabilities + Stockholders' Equity
What does the term 'consolidation' mean when referring to a firm's financial statements?
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?
Why is it important for companies to report comparative data on their financial statements?
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How many years of data are required to be shown on the balance sheet?
How many years of data are required to be shown on the balance sheet?
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How many years are required to be shown on the income statement?
How many years are required to be shown on the income statement?
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What is accounts receivable?
What is accounts receivable?
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What is the allowance for doubtful accounts?
What is the allowance for doubtful accounts?
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The allowance account has no effect on a company's earnings.
The allowance account has no effect on a company's earnings.
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What is property, plant, and equipment (PP&E)?
What is property, plant, and equipment (PP&E)?
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What is depreciation?
What is depreciation?
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What is accumulated depreciation?
What is accumulated depreciation?
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How is property, plant, and equipment (PP&E) reported on the balance sheet?
How is property, plant, and equipment (PP&E) reported on the balance sheet?
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Why is the valuation of inventories important in financial reporting?
Why is the valuation of inventories important in financial reporting?
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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.
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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.
