Questions and Answers
Who would say this? 'Will the company be capable of repaying its debt when it's due?'
Creditor
Who would say this? 'Will the company's stock increase in value?'
Investor
Financial accounting primarily deals with the methods accountants use to provide information to an organization's internal users.
False
Ron owns five percent of a corporation's common stock. The concept of limited liability would imply that Ron is personally responsible for only five percent of the financial obligations of the corporation.
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Which of the following is a feature of the corporate form of business ownership?
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Which of the following is an alternative form of the accounting equation?
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The value of a company to its owners equals total resources of the company.
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If stockholders' equity is $50,000 and liabilities are $78,000, then assets must equal:
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Expenses are best defined as:
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Dividends represent expenses of operating the company.
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Which of the following is not one of the four primary financial statements?
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The income statement records activity over an interval of time.
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Use the following amounts to calculate net income: Assets, $165,000; Dividends, $9,000; Expenses, $61,000; Liabilities, $74,000; Revenues, $82,000.
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The balance of retained earnings represents the amount of earnings paid out in the form of dividends to stockholders.
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What are the primary components of stockholders' equity?
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What is total stockholders' equity at the end of the year for Catalina Corporation that begins with a $195,000 balance in Retained Earnings and a $320,000 balance in Common Stock, generates net income of $46,000, issues additional common stock for $28,000, and pays a dividend of $5,000?
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The balance sheet:
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Knowledge Check: Franklin Corporation has the following account balances at the end of the year. What is stockholders' equity?
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The statement of cash flows:
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Indicate whether the following transaction is classified as a financing, investing, or operating activity: Purchase equipment.
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Indicate whether the following transaction is classified as a financing, investing, or operating activity: Pay salaries to employees.
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Indicate whether the following transaction is classified as a financing, investing, or operating activity: Pay dividends to shareholders.
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Study Notes
Key Financial Concepts
- Creditor: Concerns about a company's ability to repay debt on time.
- Investor: Interests in the appreciation of the company’s stock value.
Accounting Concepts
- Financial Accounting: Primarily focuses on providing information to external users, not internal users.
- Limited Liability: Stockholders are not personally responsible for a corporation’s debts; exposure is limited to their investment.
- Double Taxation: A defining feature of corporate ownership whereby income is taxed at both the corporate and shareholder levels.
Accounting Equation
- Basic Equation: Assets - Liabilities = Stockholders' Equity is a fundamental accounting equation highlighting the relationship between assets and the claims against them.
Company Value
- Company Value: The worth of a company to its owners is derived from total resources minus liabilities owed to creditors.
Financial Calculations
- Assets Calculation: If stockholders' equity is $50,000 and liabilities are $78,000, then assets must equal $128,000.
- Expenses Definition: Costs incurred in providing products and services.
Financial Statements
- Trial Balance: This is not one of the four primary financial statements (Balance Sheet, Income Statement, Statement of Cash Flows).
- Income Statement: Captures financial activity over a specific time frame, showcasing revenues and expenses.
Retained Earnings
- Retained Earnings Statement: This balance reflects cumulative earnings not distributed as dividends to stockholders.
Stockholders' Equity Components
- Components: The main elements include Common Stock and Retained Earnings, essential for determining a corporation's equity structure.
Year-End Financial Assessment
- Total Stockholders' Equity: For Catalina Corporation, end-of-year total equity calculated as $584,000 includes adjustments for net income, stock issuances, and dividends.
Balance Sheet Function
- Balance Sheet Purpose: Represents a company’s financial position at a specific point in time, detailing assets, liabilities, and equity.
Cash Flow Statement
- Statement of Cash Flows: Demonstrates the net change in cash over a designated period, reflecting operational liquidity.
Activity Classifications
- Investing Activity: Transactions such as purchasing equipment categorized under investing activities.
- Operating Activity: Example includes payroll (salaries to employees) classified under operating activities.
- Financing Activity: Actions like paying dividends fall under financing activities, indicating methods of funding operations or returning value to shareholders.
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Description
This quiz covers essential financial and accounting concepts, including creditor responsibilities, investor interests, and fundamental accounting equations. Understand the implications of limited liability, double taxation, and how to determine a company's value based on assets and liabilities.
