Questions and Answers
Which of the following is NOT a primary financial statement?
An income statement shows the company's revenues and expenses for a specific period.
True
What is the result called when revenues exceed expenses?
Net income
If expenses are greater than revenues, the company experiences a ________.
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What was the total service revenue for Eagle Soccer Academy for December 2021?
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Match the financial statement with its purpose:
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Which expense was the highest for Eagle Soccer Academy in December 2021?
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What is the total amount of expenses for Eagle Soccer Academy?
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Which account would appear in a company's income statement?
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The balance sheet reflects the financial performance of a company over an interval of time.
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What type of cash flows involve cash transactions for the purchase and sale of investments and long-term assets?
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The balance sheet equation is: Assets = _______________________ + Stockholders' Equity.
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Which statement reports a company's revenues and expenses over an interval of time?
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Dividends would appear in a company's balance sheet.
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Match the following cash flow types with their descriptions.
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What type of financial statement reports a company's cash receipts and cash payments over an interval of time?
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What is the primary role of auditors in a company?
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Auditors are employees of the company they are auditing.
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What is the purpose of an auditor's report?
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Auditors help ensure that management has in fact ________________ GAAP in preparing the company's financial statements.
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Match the following components of an auditor's report with their descriptions:
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What is the benefit of an auditor's report to investors and creditors?
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The auditor's report is the responsibility of the company's management.
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What is the significance of GAAP in financial statement preparation?
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What is the role of financial accounting in the decision-making process?
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The management discussion and analysis (MD&A) section is not a part of the annual report.
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What is the purpose of note disclosures to the financial statements?
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Accounting serves an important role in a prosperous society by measuring _______________________ and communicating useful information.
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What is the result of transactions that affect revenues or expenses reported in the income statement?
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Match the financial statement components with their descriptions:
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The balance sheet reflects the financial performance of a company over a specific period of time.
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What skills are required in the practice of accounting?
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Which of the following is a fundamental qualitative characteristic of useful financial information?
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Faithful representation is one of the enhancing qualitative characteristics.
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What is the overriding objective of qualitative characteristics in accounting?
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The __________ constraint ensures that the benefits of financial reporting information exceed the costs of providing it.
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Match each of the enhancing qualitative characteristics with its description.
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Which component enhances the faithful representation of financial information?
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Relevance and faithful representation are the two fundamental qualitative characteristics of useful financial information.
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Name one of the underlying assumptions in accounting.
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Study Notes
Communicating through Financial Statements
- Financial statements are periodic reports published by a company to provide information to external users.
- Primary financial statements include: • Income statement • Statement of stockholders' equity • Balance sheet • Statement of cash flows
Income Statement
- Reports a company's revenues and expenses over an interval of time.
- If revenues are greater than expenses, the result is net income; if revenues are less than expenses, the result is a net loss.
- Compares revenues and expenses for the current period to assess a company's ability to earn a profit.
Example of Income Statement
- Eagle Soccer Academy's income statement for the month ended December 31, 2021: • Revenues: 7,200•Expenses:7,200 • Expenses: 7,200•Expenses:6,000 • Net income: $1,200
Balance Sheet
- Reflects a company's financial position on a particular date.
- Shows that resources (Assets) equal claims to resources (Liabilities + Stockholders' Equity).
Statement of Cash Flows
- Measures activities involving cash receipts and cash payments over an interval of time.
- Classifies cash flows into three categories: • Operating cash flows (involving revenue and expense) • Investing cash flows (for the purchase and sale of investments and long-term assets) • Financing cash flows (with lenders and stockholders)
Other Information Reported to Outsiders
- Annual report includes financial statements, management's discussion and analysis (MD&A), and note disclosures to the financial statements.
- MD&A provides management's views on significant events, trends, and uncertainties.
- Note disclosures offer additional information to explain the information presented in the financial statements.
Auditors
- Trained individuals hired by a company as an independent party to express a professional opinion on the extent to which financial statements are prepared in compliance with GAAP and are free of material misstatement.
- Help ensure that management has appropriately applied GAAP in preparing the company's financial statements.
Conceptual Framework
- Fundamental qualitative characteristics: • Relevance • Faithful representation • Comparability • Verifiability • Timeliness • Understandability
- Enhancing qualitative characteristics: • Predictive value • Confirmatory value • Neutrality • Completeness
- Cost constraint
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Description
Financial statements are periodic reports published by a company to provide information to external users. These statements include income statements, balance sheets, and statements of cash flows.