Questions and Answers
Stockholders' equity is composed of contributed capital and retained earnings.
True
Current assets include all of the following: cash, inventory, equipment, supplies, and accounts receivable.
False
A company with healthy cash flows from operating activities is in a good position to repay its debts.
True
The ending cash balance is shown on the Balance Sheet and the Statement of Retained Earnings.
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Which financial statement would you analyze to assess a firm's operating performance for the past year?
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The independent auditor's report conveys whether or not the business is a good investment.
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What is unearned revenue?
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Which of the following invests funds into a business and is considered an owner?
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An income statement provides information at one specific point in time, while the other basic financial statements provide information on activities that occur over a period of time.
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Which one of the following is not an external user of financial statements?
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The Statement of Cash Flows, like the Income Statement, reports only operating activities and other activities of a company.
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Current liabilities are typically listed in the order in which they will be paid.
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The four basic financial statements are the Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows.
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In which form of organization are the owners' legal responsibility for the debt of the business limited to the amount they invested in the business?
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Businesses engage in which of the following three main activity categories?
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Even though a trial balance reveals that the debits equal the credits, there still may be errors in the company's books.
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The initial step in the recording process is sometimes referred to as journalizing.
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The television news report about High Point Furniture Company is an example of financial information that is what?
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A company in the process of liquidation is considered to be under the going concern assumption.
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The dividends account has a normal debit balance.
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If an accountant is uncertain about the best estimate of an amount for a business transaction, which quality is characterized by selecting the amount least likely to overstate assets and earnings?
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Which of the following organizations is primarily responsible for establishing GAAP in the United States?
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Because it tends to provide the most reliable measure of activity, all assets are reported on the balance sheet at their fair market values.
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Which of the following is an assumption made in the preparation of the financial statements?
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If a company performed services for credit, then the debit side of the journal entry would be to Accounts Payable and the credit would be to Service Revenue.
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According to the historical cost principle, assets are always carried at their current market value.
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During March, Honeybaked Spam purchased supplies for cash. What effect does this transaction have on the accounting equation at the time the supplies are purchased?
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A full disclosure policy stipulates that all information that would make a difference to financial statement users should be revealed.
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GAAP has established a universal chart of accounts that is applicable to all businesses in the United States.
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The issuance of common stock increases a company's assets and stockholders' equity.
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Study Notes
Stockholders Equity
- Comprises contributed capital and retained earnings.
Current Assets
- Does not include equipment; includes cash, inventory, supplies, and accounts receivable.
Cash Flows
- Healthy cash flows from operating activities indicate a strong ability to repay debts.
Financial Statements
- The ending cash balance is shown on the Balance Sheet, but not in the Statement of Retained Earnings.
- The Income Statement analyzes a firm's operating performance over the past year.
- The Statement of Cash Flows reports more than just operating activities.
Audits and Investments
- The independent auditor's report does not determine if a business is a good investment.
- Stockholders invest funds and are considered owners of the business.
Users of Financial Statements
- Company's president is not an external user of financial statements.
Current Liabilities
- Typically listed in the order they will be paid.
Basic Financial Statements
- Four essential financial statements: Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows.
Business Organizations
- In a corporation, owners' legal liability is limited to their investment.
Business Activities
- Three primary activities: Financing, Investing, and Operating.
Trial Balance and Journalizing
- A trial balance showing equal debits and credits can still indicate errors in financial records.
- The first step in the recording process is known as journalizing.
Relevant Financial Information
- Reports from media, like lawsuits affecting profitability, provide relevant financial information.
Going Concern Assumption
- A company going through liquidation does not adhere to the going concern assumption.
Dividends
- The dividends account holds a normal debit balance.
Accounting Principles
- Conservatism is selecting amounts that least likely overstate assets and earnings.
- Financial Accounting Standards Board (FASB) establishes GAAP in the U.S.
Valuation and Disclosure
- Assets are recorded at historical cost, not current market value.
- Full disclosure policy mandates revealing all significant financial information for users.
- GAAP does not include a universal chart of accounts for all businesses.
Common Stock
- Issuing common stock increases both assets and stockholders' equity.
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Test your knowledge with this quiz on accounting concepts. This set of flashcards covers topics such as stockholders equity, current assets, and cash flows. Ideal for students looking to reinforce their understanding of financial principles.