Financial Accounting McGraw-Hill Chapter 1

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Questions and Answers

What is accounting?

A method for selling products.

A system that collects and processes financial information about an organization's business activities. (correct)

A way to manage human resources.

A plan for organizational growth.

What are financing activities?

Borrowing or paying back money to lenders and receiving additional funds from stockholders or paying them dividends.

What are investing activities?

Buying or selling items such as plant and equipment used in the production of beverages.

What are operating activities?

The day-to-day process of purchasing raw materials and other ingredients, manufacturing beverages, delivering them to customers, collecting cash from customers, and paying suppliers. Signup and view all the answers

What is management accounting?

Developing accounting information for internal decision makers. Signup and view all the answers

What do supply chain managers analyze?

Suppliers' financial statements to see whether they have the resources to meet demand and invest in future development. Signup and view all the answers

What is financial accounting?

The field of accounting that focuses on providing information for external decision makers. Signup and view all the answers

How do human resource managers use financial statements?

They use them as a basis for contract negotiations over pay rates. Signup and view all the answers

What does a balance sheet report?

The financial position (amount of assets, liabilities, and stockholders' equity) of an accounting entity at a particular point in time. Signup and view all the answers

What contains the heading of a balance sheet?

<ol> <li>Name of the entity 2. Title of the statement (Balance Sheet) 3. Specific date of the statement 4. Unit of measure.</li> </ol> Signup and view all the answers

What is the Basic Accounting Equation?

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

What is an accounting entity?

The organization for which financial data are collected. Signup and view all the answers

What does financial position refer to?

The economic resources that the company owns and the sources of financing for those resources. Signup and view all the answers

What are assets?

Economic resources owned by the entity. Signup and view all the answers

What are Accounts Receivable?

Promises to pay (collected in cash later). Signup and view all the answers

How are assets on balance sheets measured?

At the total cost incurred to acquire them. Signup and view all the answers

What are liabilities?

Indicate the amount of financing provided by creditors (company's debts or obligations). Signup and view all the answers

What are accounts payable?

Purchase of goods or services from suppliers on credit without a formal written contract. Signup and view all the answers

What are notes payable to banks?

Result from cash borrowings based on a formal written debt contract with banks. Signup and view all the answers

What is stockholders' equity?

The amount of financing provided by owners of the business and reinvested earnings. Signup and view all the answers

What is common stock?

The investment of cash and other assets in the business by the stockholders. Signup and view all the answers

What are retained earnings?

The amount of earnings (profits) reinvested in the business (not given to stockholders as dividends). Signup and view all the answers

What is total stockholder's equity?

Sum of the common stock plus the retained earnings. Signup and view all the answers

What is the importance of assets?

Provides a basis for judging whether a company has sufficient resources available to operate, and they could be sold for cash in the event it goes out of business. Signup and view all the answers

Who receives money first if a company goes out of business and assets are sold?

Creditors' claims legally come before those of the owners and come before paying back stockholders. Signup and view all the answers

What does an income statement report?

The accountant's primary measure of performance: revenues less expenses during the accounting period (net income). Signup and view all the answers

What is included in the heading of an income statement?

<ol> <li>Name of the entity 2. Title of the report (income statement) 3. Unit of measure 4. Specified period of time.</li> </ol> Signup and view all the answers

What is an accounting period?

The time period covered by the financial statements. Signup and view all the answers

What is the income statement equation?

Revenues - Expenses = Net Income. Signup and view all the answers

What are revenues?

Cash and promises received from the delivery of goods and services. Signup and view all the answers

What are expenses?

Resources used to earn the period's revenues. Signup and view all the answers

What is net income?

Excess of total revenues over total expenses. Signup and view all the answers

Does net income equal the net cash generated by operations?

False Signup and view all the answers

What is the statement of stockholders' equity?

Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period. Signup and view all the answers

What is included in the heading of the statement of stockholders' equity?

<ol> <li>Name of entity 2. Title of report (statement of stockholders' equity) 3. Unit of measure used in the statement 4. Specified period in time.</li> </ol> Signup and view all the answers

What does retained earnings report?

The way that net income and the distribution of dividends affected the company's financial position during that accounting period. Signup and view all the answers

How to calculate retained earnings in the statement of stockholders' equity?

Beginning of the year retained earnings + Net income - Dividends = End of year retained earnings. Signup and view all the answers

What does the retained earnings portion of the statement of stockholders' equity indicate?

The relationship of the income statement to the balance sheet. Signup and view all the answers

Why do investors examine retained earnings?

To determine whether the company is reinvesting a sufficient portion of earnings to support future growth. Signup and view all the answers

What does the statement of cash flows report?

Inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing activities. Signup and view all the answers

What is included in the heading of the statement of cash flows?

<ol> <li>Name of entity 2. Title of the report (cash flow statement) 3. Unit of measure 4. Specified period of time.</li> </ol> Signup and view all the answers

What does CFO stand for?

Cash flows from operating activities. Signup and view all the answers

What does CFI stand for?

Cash flows from investing activities. Signup and view all the answers

What does CFF stand for?

Cash flows from financing activities. Signup and view all the answers

What is the cash flow statement equation?

+/- CFO + +/- CFI + +/- CFF = Change in Cash + Beginning Cash Balance = Ending Cash Balance. Signup and view all the answers

Study Notes

Accounting Concepts

Accounting is a system that collects, processes, and reports financial information regarding an organization's business activities to aid decision-making.
Financial accounting primarily focuses on providing information for external decision makers.
Management accounting is aimed at developing information for internal decision makers.

Activities in Accounting

Financing activities involve borrowing or repaying loans and managing stockholder funds, including dividends.
Investing activities entail the buying/selling of long-term assets like plant and equipment.
Operating activities represent the day-to-day operations, including purchasing, manufacturing, delivering products, and managing cash flow.

Financial Statements Overview

A balance sheet displays the financial position of an entity at a specific time, detailing assets, liabilities, and stockholders' equity.
The basic accounting equation is: Assets = Liabilities + Stockholders' Equity.
Key components of a balance sheet include the entity's name, title, date, and unit of measure.

Assets and Liabilities

Assets represent economic resources owned by the entity, measured at total acquisition cost.
Liabilities indicate the company's obligations to creditors and can include accounts payable (short-term debts) and notes payable (formal debts to banks).
Stockholders' equity includes funds from owners and retained earnings reinvested in the business.

Income Statement

The income statement reports a company’s performance, calculated as Revenues - Expenses = Net Income.
It covers a specific accounting period and highlights resources used to generate revenues.
Net income represents the excess of revenues over expenses; however, it does not equate to cash generated from operations.

Statement of Stockholders' Equity

Reflects how net income and dividends distributed impact the company’s financial position through the accounting period.
The calculation includes beginning retained earnings plus net income minus dividends to reach end-of-year retained earnings.
Investors often analyze retained earnings to determine reinvestment levels for future growth.

Statement of Cash Flows

This statement shows cash inflows and outflows categorized into operating, investing, and financing activities.
The cash flow statement equation is: +/- CFO (cash flows from operating activities) +/- CFI (from investing activities) +/- CFF (from financing activities) = change in cash, plus beginning cash balance equals ending cash balance.
Categories include:
- CFO: Cash flows directly related to income generation from operations.
- CFI: Cash flows from purchasing or selling long-term investments and assets.
- CFF: Cash flows from dealings with investors and creditors.

Importance of Financial Analysis

Assessing financial position helps stakeholders understand a company's resource adequacy and potential future performance.
Creditors reclaim their investments before stockholders in the event of liquidation.
Financial managers and analysts utilize these statements to make informed decisions on resource allocation and operational efficiency.

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Test your knowledge with these flashcards based on Chapter 1 of McGraw-Hill's Financial Accounting. These cards cover key terms and definitions essential for understanding the foundations of accounting, financing, and investing activities. Perfect for students looking to reinforce their comprehension of financial principles.