Principles of Accounting - D074: UNIT 3
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Questions and Answers

What does the balance sheet tell you about?

  • Company's cash flows
  • Company's profitability
  • Company's accumulated profits
  • Company's asset mix (correct)

    • What is the income statement?

    A report of the revenues and expenses of a company during a period.

    What does the statement of cash flows explain?

    Where cash is coming from and where cash is going.

    What is the purpose of the statement of retained earnings?

    <p>Shows the accumulated profits or losses of a business since it started.</p> Signup and view all the answers

    What is Form 10-K?

    <p>The annual report that publicly traded companies must file with the SEC.</p> Signup and view all the answers

    What is Form 10-Q?

    <p>The quarterly report that publicly traded companies must file with the SEC.</p> Signup and view all the answers

    What is the Securities and Exchange Commission (SEC)?

    <p>The U.S. government agency charged with regulating financial markets.</p> Signup and view all the answers

    What is the Central Index Key (CIK)?

    <p>A unique identifying number for each company in the SEC's EDGAR system.</p> Signup and view all the answers

    How often is Form 10-Q filed?

    <p>Quarterly</p> Signup and view all the answers

    How often is Form 10-K filed?

    <p>Annually</p> Signup and view all the answers

    What are liabilities?

    <p>Obligations to pay cash, transfer other assets, or provide services to someone else.</p> Signup and view all the answers

    What are assets?

    <p>Money and other valuables belonging to an individual or business.</p> Signup and view all the answers

    What is owners' equity?

    <p>The remaining claim against the assets of a business after the liabilities have been deducted.</p> Signup and view all the answers

    What are Accounts Receivable?

    <p>Amounts owed to a company that sold goods or services to a customer on credit.</p> Signup and view all the answers

    What are Accounts Payable?

    <p>Amount owed as a result of the purchase of goods and services on credit.</p> Signup and view all the answers

    What are Taxes Payable?

    <p>Amount owed to federal and state governments resulting from the application of tax laws.</p> Signup and view all the answers

    What is Mortgage Payable?

    <p>Amount owed relating to the purchase of property.</p> Signup and view all the answers

    What is Unearned Revenue?

    <p>Amount owed in services or products to a customer who paid in advance.</p> Signup and view all the answers

    What is Capital Stock?

    <p>The amount given by shareholders to obtain shares of stock from a company.</p> Signup and view all the answers

    What are Retained Earnings?

    <p>Earnings that are retained in the business.</p> Signup and view all the answers

    What are liquid assets?

    <p>Cash and items that can be quickly converted to cash.</p> Signup and view all the answers

    What are illiquid assets?

    <p>Assets that may require months to sell and convert to cash.</p> Signup and view all the answers

    What is a classified balance sheet?

    <p>A balance sheet that distinguishes between current and long-term assets.</p> Signup and view all the answers

    What is market value?

    <p>The price at which property would sell.</p> Signup and view all the answers

    What is book value?

    <p>The value of a company measured by the amount of owners equity in the company.</p> Signup and view all the answers

    What is an Asset?

    <p>Economic resource owned or controlled by a company.</p> Signup and view all the answers

    What is a Liability?

    <p>Economic obligation to deliver assets or provide a service.</p> Signup and view all the answers

    What is Equity?

    <p>Equal to total assets minus total liabilities.</p> Signup and view all the answers

    What is the accounting equation?

    <p>Assets = Liabilities + Owners' Equity.</p> Signup and view all the answers

    Why does the balance sheet not reflect the current value or worth of a company?

    <p>Many assets are recorded at cost, and some economic assets are not recorded at all.</p> Signup and view all the answers

    What characterizes the elements and purposes of a balance sheet?

    <p>It portrays the financial condition of a company at a point in time.</p> Signup and view all the answers

    What is owners' equity?

    <p>The residual amount representing the net assets available after liabilities.</p> Signup and view all the answers

    What information should be included on the balance sheet?

    <p>Assets and liabilities.</p> Signup and view all the answers

    What is revenue?

    <p>The amount of assets created from the sale of goods or services.</p> Signup and view all the answers

    What are expenses?

    <p>The amount of assets consumed in generating revenue.</p> Signup and view all the answers

    What is net income?

    <p>The difference between total revenue and total expenses when total revenue is greater.</p> Signup and view all the answers

    What is gross profit?

    <p>Sales - COGS.</p> Signup and view all the answers

    What is operating income?

    <p>The result of what a company does on a daily basis.</p> Signup and view all the answers

    What is earnnings (loss) per share (EPS)?

    <p>The amount of net income related to each share of stock.</p> Signup and view all the answers

    What is a gain?

    <p>Making money from an activity outside the normal activities of a business.</p> Signup and view all the answers

    What does the statement of cash flows explain?

    <p>A report of the operating, investing, and financing cash flows of a company.</p> Signup and view all the answers

    What are dividends?

    <p>Earnings that are not retained in the business.</p> Signup and view all the answers

    What characterizes the elements of a statement of retained earnings?

    <p>It portrays the accumulated profits or losses of a company at a point in time.</p> Signup and view all the answers

    What is the Statement of Cash Flows?

    <p>A financial statement that provides information about cash receipts and payments.</p> Signup and view all the answers

    What are the cash flow categories of the statement of cash flows?

    <p>Operating activities, investing activities, financing activities.</p> Signup and view all the answers

    What are operating activities?

    <p>Activities that are part of the day-to-day business of a company.</p> Signup and view all the answers

    What are investing activities?

    <p>Activities associated with buying and selling long-term assets.</p> Signup and view all the answers

    What are financing activities?

    <p>Activities whereby cash is obtained from or repaid to owners and creditors.</p> Signup and view all the answers

    What is articulation in financial statements?

    <p>The interrelations among the financial statements.</p> Signup and view all the answers

    What does the income statement explain?

    <p>The change in the retained earnings balance in the balance sheet.</p> Signup and view all the answers

    What does the statement of cash flows explain?

    <p>The change in the cash balance in the balance sheet.</p> Signup and view all the answers

    Which of these activities is an investing activity?

    <p>Buying buildings</p> Signup and view all the answers

    Which of these activities is an operating activity?

    <p>Selling goods</p> Signup and view all the answers

    What is the purpose of the notes to the financial statements?

    <p>To present assumptions needed to explain financial statements</p> Signup and view all the answers

    What are the four general categories of financial statement notes?

    <p>Summary of significant accounting policies, additional information, disclosure, supplementary information.</p> Signup and view all the answers

    What is the significance of a summary of significant accounting policies?

    <p>It outlines the methods and assumptions used in preparing financial statements.</p> Signup and view all the answers

    What additional information might be included about summary totals?

    <p>Inventory make up, receivables gross amount and allowance for bad debts, pension liability.</p> Signup and view all the answers

    What type of information might be disclosed that is not recognized in the financial statements?

    <p>Status of legal proceedings, subsequent events.</p> Signup and view all the answers

    What is the purpose of disclosure in financial statements?

    <p>To convey information to users when the information is too uncertain to be recognized.</p> Signup and view all the answers

    What is recognition in accounting?

    <p>Including estimates and judgments in the financial statements.</p> Signup and view all the answers

    What is supplementary information in financial statements?

    <p>Business segment information, domestic/international sales breakdown.</p> Signup and view all the answers

    Why do the notes to the financial statements contain a summary of significant accounting policies?

    <p>Because accounting involves making assumptions, estimates, and judgments.</p> Signup and view all the answers

    What is the purpose of a classified balance sheet?

    <p>To distinguish between current and long-term assets.</p> Signup and view all the answers

    Which item would be classified in the owners' equity section of the balance sheet?

    <p>Retained earnings.</p> Signup and view all the answers

    How is gross profit calculated?

    <p>Sales − cost of goods sold − operating expenses.</p> Signup and view all the answers

    What is financial statement analysis?

    <p>Examining both the relationships among financial statement numbers and the trends in those numbers over time.</p> Signup and view all the answers

    What is common-size analysis?

    <p>An accounting tool that focuses on line items as a percentage of a selected figure.</p> Signup and view all the answers

    What is horizontal analysis?

    <p>Comparing percentages over time for the same company.</p> Signup and view all the answers

    What does a common-size balance sheet involve?

    <p>Dividing each item by total assets for that year.</p> Signup and view all the answers

    What does a common-size income statement reveal?

    <p>The number of pennies of each expense for each dollar of sales.</p> Signup and view all the answers

    What does examining trends across time allow us to determine?

    <p>How expenses are changing relative to sales.</p> Signup and view all the answers

    What is the definition of financial statement analysis?

    <p>Examining both the relationships among financial statement numbers and the trends in those numbers over time.</p> Signup and view all the answers

    How is a common-size income statement created?

    <p>By dividing all income statement amounts for a given year by sales for that year.</p> Signup and view all the answers

    What is the purpose of performing horizontal analysis of financial statements?

    <p>To highlight trends that may be occurring in the company over time.</p> Signup and view all the answers

    What does vertical analysis allow an accountant to do?

    <p>Quickly see how a company compares to others in its industry.</p> Signup and view all the answers

    What can be evaluated through comparing financial statements of different companies?

    <p>Where expenses might be different across the companies.</p> Signup and view all the answers

    What is vertical analysis of financial statements?

    <p>Displaying each line item as a percentage of another for comparison.</p> Signup and view all the answers

    How does vertical financial statement analysis inform your understanding of a company's performance?

    <p>It tells you what questions you need to be asking about a company's performance.</p> Signup and view all the answers

    Which types of companies can be compared using vertical analysis?

    <p>Companies that provide the same types of goods or services.</p> Signup and view all the answers

    What does vertical analysis allow an accountant to determine?

    <p>How expenses are changing relative to total sales.</p> Signup and view all the answers

    Study Notes

    Financial Statements Overview

    • Balance Sheet: Displays a company's assets and liabilities, indicating asset mix and liability mix at a specific point in time.
    • Income Statement: Provides insight into a company's profitability over a given period, detailing revenues and expenses.
    • Statement of Cash Flows: Shows the sources and uses of cash, categorized into operating, investing, and financing activities.
    • Statement of Retained Earnings: Reflects accumulated profits or losses since the inception of the business, linking the income statement and balance sheet.

    Regulatory Filings

    • Form 10-K: Annual report filed with the SEC by publicly traded companies, including the three primary financial statements.
    • Form 10-Q: Quarterly report filed with the SEC reflecting the company's financial performance for the quarter.

    SEC and CIK

    • Securities and Exchange Commission (SEC): U.S. government agency regulating financial markets to ensure reliable financial information is available.
    • Central Index Key (CIK): A unique identifier for companies within the SEC's EDGAR database, enabling the identification of specific businesses.

    Key Accounting Concepts

    • Liabilities: Obligations requiring the payment of cash, transfer of assets, or provision of services to other parties.
    • Assets: Economic resources under the control of a company, encompassing cash and valuables.
    • Owners' Equity: Residual interest in the assets of a business after deducting liabilities, representing ownership stake.

    Financial Measurements and Ratios

    • Accounting Equation: Assets = Liabilities + Owners' Equity; fundamental relationship in accounting.
    • Net Income: Revenue minus expenses; indicators of a company's overall performance.
    • Earnings per Share (EPS): Net income allocated to each share of outstanding stock, crucial for determining shareholder value.

    Financial Statements Analysis

    • Common-Size Analysis: Presents all financial statement amounts as a percentage of a common figure, facilitating comparison across companies and time.
    • Horizontal Analysis: Evaluates financial data over time, highlighting trends and changes in financial metrics.

    Financial Statement Notes

    • Purpose of Notes: Provide additional context and details not captured in the financial statements, such as accounting policies, pending legal issues, and significant assumptions.
    • Categories of Notes: Include significant accounting policies, additional summary totals, unrecognized disclosures, and supplementary information required by regulatory bodies.

    Classified Balance Sheet

    • Classification Function: Distinguishes between current and long-term assets, aiding in liquidity and financial position assessment.

    Financial Performance Insights

    • Vertical Analysis: Demonstrates each line item as a percentage of a key figure (e.g., total assets or sales), improving comparative analysis across similar companies.
    • Operating Activities: Day-to-day business transactions; cash inflows come from sales, while cash outflows include inventory purchases and operating expenses.

    Cash Flows

    • Operating Activities: Daily cash flows from core operations; significant inflows from product sales, with outflows for operational costs.
    • Investing Activities: Transactions involved in purchasing and selling long-term assets like property and equipment.
    • Financing Activities: Cash movements related to funding through investments or loan repayments.

    Additional Concepts

    • Unearned Revenue: Liability for goods/services to be delivered in the future due to advance payments.
    • Liquid vs. Illiquid Assets: Liquid assets can be quickly converted to cash, whereas illiquid assets require time to sell and generate cash.

    Dividends

    • Dividends: Earnings distributed to shareholders rather than retained within the company, indicating profit sharing with owners.

    Understanding Financial Statements

    • Financial Statement Analysis: Evaluates the relationships and trends in financial statement data to inform investors and stakeholders about the company’s performance and health.
    • Articulation of Statements: Reflects how financial statements interrelate, showing changes in cash and retained earnings.

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    Description

    This quiz covers key concepts from UNIT 3 of Principles of Accounting, including essential financial statements such as balance sheets, income statements, statements of cash flows, and statements of retained earnings. Enhance your understanding of these fundamental accounting principles and their significance in assessing a company's financial health.

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