Finance Activities Overview

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Questions and Answers

What are operating activities related to?

Cash paid to stockholders

Cash received from issuing stock

Cash received from customers (correct)

Cash paid to suppliers (correct)

What are financing activities related to?

Cash paid for advertising

Cash received from investors (correct)

Cash paid as dividends (correct)

Cash received from selling office equipment

What is the definition of investing activities?

Cash paid to purchase a new office building

What account title is affected by costs incurred for advertising?

Advertising expense Signup and view all the answers

What account title is affected by assets received for services performed?

Service revenue Signup and view all the answers

What account title is affected by costs incurred for insurance?

Insurance expense Signup and view all the answers

What account title is affected by amounts paid to employees?

Salaries and wages expense Signup and view all the answers

What is the account title affected by cash distributed to stockholders?

Not applicable Signup and view all the answers

What account title is affected by assets received in exchange for allowing the use of the company's building?

Rent revenue Signup and view all the answers

What account title is affected by costs incurred for utilities used?

Utilities expense Signup and view all the answers

What is the impact of cash purchase of equipment on stockholders' equity?

Does not affect Stockholders' Equity Signup and view all the answers

What account title is affected by cash received from investors?

Common stock Signup and view all the answers

What elements are involved in the income statement?

Income tax expense, Sales revenue, Cost of goods sold, Interest expense Signup and view all the answers

What elements are included in a balance sheet?

Inventory, Accounts payable, Retained earnings, Equipment, Common stock, Accounts receivable Signup and view all the answers

What does an auditor's opinion signify?

An expression about whether financial statements conform with generally accepted accounting principles Signup and view all the answers

What defines a corporation?

A business that raises money by issuing shares of stock Signup and view all the answers

What is common stock?

The portion of stockholders' equity that results from receiving cash from investors Signup and view all the answers

What is accounts payable?

Obligations to suppliers of goods Signup and view all the answers

What is accounts receivable?

Amounts due from customers Signup and view all the answers

What is a creditor?

A party to whom a business owes money Signup and view all the answers

What does a stockholder do?

A party that invests in common stock Signup and view all the answers

What defines a partnership?

A business that is owned jointly by two or more individuals but does not issue stock Signup and view all the answers

What is a liability?

Payable Signup and view all the answers

What are assets?

Receivable, equipment, inventory, cash Signup and view all the answers

What defines revenue?

Revenue Signup and view all the answers

What defines expense?

Expense Signup and view all the answers

What are financial statements?

The total cumulative amount received from stockholders in exchange for common stock; Total revenue from operating activities Signup and view all the answers

What do notes to the financial statements indicate?

The interest rate that the company is being charged on all outstanding debts Signup and view all the answers

What is management discussion and analysis?

Management's assessment of the company's results Signup and view all the answers

What does 'not disclosed' refer to?

The names and positions of all employees hired in the last year Signup and view all the answers

What are the components of an income statement?

Revenue, Expenses, Net income (loss), Period of Time Signup and view all the answers

What is the formula for the statement of retained earnings?

Beginning Retained Earnings + Net Income - Dividends = Ending RE Signup and view all the answers

What is indicated by the balance sheet?

Assets = Liabilities + Stockholders' equity Signup and view all the answers

What is the statement of cash flows?

Period of Time, Operating, Investing, Financing Signup and view all the answers

What does 'assets =' represent in accounting?

Liabilities + Stockholders' equity (retained earnings & capital/common stock) Signup and view all the answers

What are considered investing activities?

Marketable securities, fixed assets Signup and view all the answers

What are the components of financing activities?

Creditors, stock, dividends Signup and view all the answers

What is the formula for ending retained earnings?

Beginning balance of retained Earnings + Net Income - Dividends Signup and view all the answers

What is the formula for net income?

Revenue - Expenses Signup and view all the answers

What are current assets?

Accounts receivable Signup and view all the answers

What defines property, plant & equipment (PP&E)?

Used by the business; what you pay is what it goes on the balance sheet as (Historical Cost Principle); NOT the value of the business Signup and view all the answers

What are intangibles?

No physical substance; patented logos & taglines Signup and view all the answers

What defines current liabilities?

Notes payable, Accounts payable Signup and view all the answers

What is defined as long-term liabilities?

Notes payable Signup and view all the answers

What are stockholders' (owners) equity components?

Current assets, Retained earnings Signup and view all the answers

What is profitability?

Operating success for a given period of time; Income Statement; Earnings Per Share Signup and view all the answers

What is liquidity?

Ability to pay obligations expected due within the year; Working capital; Current ratio Signup and view all the answers

What is solvency?

Ability to survive over time; Debt-to-assets; Free cash flow Signup and view all the answers

Study Notes

Operating Activities

Involves cash flows from primary business activities.
Cash received from customers is a core component.
Cash paid to suppliers represents outflows necessary for operations.

Financing Activities

Involves cash flows related to funding the business.
Cash paid to stockholders as dividends reflects returns on investments.
Cash received from issuing new common stock indicates capital raised from investors.

Investing Activities

Includes cash transactions for acquiring or disposing of long-term assets.
Example: cash paid for purchasing a new office building signifies investment in real estate.

Costs and Expenses

Advertising costs are categorized under advertising expense, impacting net income.
Insurance costs are classified as insurance expense, reflecting operational risk management.
Employee salaries and wages are recorded as salaries and wages expense, a significant operating cost.
Utility costs are logged under utilities expense, another recurring operational expense.

Revenue Recognition

Assets received in exchange for services performed are classified as service revenue.
Rental income from allowing others to use company property is recorded as rent revenue.

Financial Statements Overview

The Income Statement summarizes revenues (sales revenue), expenses (cost of goods sold, operating expenses), and income tax expense over a specified period.
The Balance Sheet provides a snapshot of company financial position, listing assets (inventory, equipment, accounts receivable) and liabilities (accounts payable, retained earnings).
Financial Statements give a cumulative overview of stockholders' equity related to common stock issued and revenues from operating activities.

Key Accounting Terms

Auditor's Opinion assesses financial statements' conformity with accounting principles, ensuring they present a fair view of the company's financial position.
A Corporation raises funds through issuing shares, while a Partnership involves multiple individuals co-owning a business without stock issuance.
Common Stock represents cash received from shareholders.
Accounts Payable refers to obligations owed to suppliers, while Accounts Receivable indicates amounts owed by customers.

Liabilities and Assets

Liabilities consist of amounts payable, representing financial obligations.
Assets include various forms like receivables, inventory, and cash, reflecting ownership resources.

Retained Earnings and Profitability

Retained earnings calculations involve tracking beginning balances, adding net income, and subtracting dividends issued.
Profitability is assessed via Earnings Per Share to gauge operational success.

Current and Long-term Financial Health

Current Assets (liquidatable for cash) include cash and accounts receivable; critical for meeting short-term obligations.
Property, Plant, and Equipment (PP&E) are recorded at historical cost, representing long-term investments.
Intangible assets lack physical substance but hold value, such as patented logos.
Current Liabilities encompass short-term obligations like notes and accounts payable.
Long-Term Liabilities indicate debts with extended repayment periods.

Financial Ratios

Liquidity is measured through current ratio and working capital to judge short-term financial health.
Solvency assesses the ability to sustain operations over time, evaluated through debt-to-assets ratio and free cash flow.

Key Calculations

Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends.
Net Income is determined by subtracting total expenses from total revenue.

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Description

This quiz covers the essential elements of operating, financing, and investing activities in finance. It highlights cash flows from core business operations, funding avenues like dividends, and investment in long-term assets. Understanding these concepts is crucial for effective financial management and reporting.