Questions and Answers
What does the income statement show?
The flow of revenues and expenses generated by a firm between two dates.
Which financial statements must be produced by a public company? (Select all that apply)
Why does a firm produce financial statements?
To provide interested outside parties such as creditors with information about the firm's financial condition.
In the U.S., publicly traded companies can choose whether or not they wish to release periodic financial statements.
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What are the major components of stockholders' equity?
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What does GAAP stand for?
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What is a company's after-tax profits measured per unit of common stock called?
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What is a consensus estimate of future earnings by individuals that are not employees of the firm called?
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Investors use earnings to make forecasts about a company's _____ and ultimately stock price.
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The balance sheet shows the assets, liabilities, and stockholders' equity of a firm over a given length of time.
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Which of the following are considered operating expenses on the income statement? (Select all that apply)
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What is the firm's net income?
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What are the required financial statements every public company must produce quarterly and annually? (Select all that apply)
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What checks are there on the accuracy of financial statements?
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Study Notes
Income Statement
- Displays revenues from product/service sales at the top and net income at the bottom.
- Reflects the flow of revenues and expenses over a specific period, not just at a single point in time.
Required Financial Statements for Public Companies
- Statement of cash flows
- Balance sheet
- Income statement
- Excludes statement of activities
Purpose of Financial Statements
- Provide information about a firm's financial condition to external parties, like creditors.
- Indicate both short- and long-term financial health.
Release of Financial Statements in the U.S.
- Publicly traded companies must release periodic financial statements; they cannot opt-out.
Major Components of Stockholders' Equity
- Common stock
- Paid-in surplus
- Retained earnings
GAAP
- Stands for Generally Accepted Accounting Principles.
- Established by the Financial Accounting Standards Board (FASB).
- Required format for reports submitted to the SEC.
Earnings Per Share (EPS)
- Measures after-tax profits allocated per unit of common stock.
Analysts' Estimates
- Reflect consensus projections of future earnings based on insights from non-employees.
Earnings and Cash Flows
- Investors assess earnings to forecast a company's cash flows and influence stock prices.
Balance Sheet Misconception
- Incorrectly believed to show assets, liabilities, and stockholders' equity over a timeframe; it actually provides a snapshot at a single point in time.
Operating Expenses Included on the Income Statement
- General and administrative expenses
- Depreciation and amortization
- Salaries
- Excludes corporate taxes
Firm's Net Income
- Represents total sales and other income minus all costs, taxes, and expenses for a given period.
- Indicates profitability and appears as the last line on the income statement.
Requirements for Public Companies
- Must prepare quarterly and annual financial statements, including:
- Statement of financial position
- Income statement
- Statement of cash flows
- Statement of stockholders' equity
Accuracy Checks on Financial Statements
- Must follow a standardized set of rules during preparation.
- Companies need to hire auditors to verify annual financial statements according to GAAP.
- The Sarbanes-Oxley Act mandates the CEO and CFO to attest the accuracy of financial statements.
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Description
Test your knowledge on key concepts from Chapter 2 of your accounting studies. This quiz covers important definitions and details about income statements and financial statements of public companies, helping reinforce your understanding of financial reporting.
