Chapter 1 Financial Statements PDF

Chapter 1 - The Financial Statements Directed Reading Worksheet Answer Key Part I: Explain why accounting is critical to businesses (LO1) 1. What are financial statements? Business documents companies use to report the results of their activities to people and...

Chapter 1 - The Financial Statements Directed Reading Worksheet Answer Key Part I: Explain why accounting is critical to businesses (LO1) 1. What are financial statements? Business documents companies use to report the results of their activities to people and groups that can include managers, investors, creditors, and regulatory agencies 2. List the basic financial statements. a. Income statement b. Statement of retained earnings c. Balance sheet d. Statement of cash flows 3. What does the word net refer to in accounting? An amount after a subtraction 4. What is net income (profit)? The excess of revenues (net sales) over expenses 5. What were net sales for The Walt Disney Company, for its year ended October 1, 2016? For its year ended October 3, 2015? On what statement do you find this information? 2016: $55,632 million 2015: $52,465 million Income Statement 6. _____________________ is an information system that measures business activities, processes data into financial statements and reports, and communicates results to decision makers. Accounting 7. What is the accounting cycle? The process by which a company’s financial statements are prepared 8. _____________________ is a mechanical part of accounting, just as arithmetic is a part of mathematics; accounting as a field is much more than this mechanical part. Bookkeeping 9. Who uses accounting information? a. Individuals  b. Investors and creditors c. Regulatory bodies d. Nonprofit organizations 10. What two branches of accounting are based on whether the user is external or internal? a. Financial accounting (external) b. Managerial accounting (internal) 11. A _____________________ form of business organization consists of a single owner and the owner is personally liable for all the business’s debts. Proprietorship 12. Income from the ______________________ form of business organization “flows through” to the owners; each owner can legally bind all partners into unlimited debt. Partnership 13. When organized as a _____________________, the owners are not personally liable for the business’s debts and the business’s income “flows through” to the owners to be taxed at the owners’ own tax rates. Limited-Liability Company 14. Although its advantages include the ability to raise large sums of capital and the no personal liability for its owners, one potential disadvantage of the _______________________ form of business organization is that its income is subject to double taxation. Corporation 15. Who (or what) ultimately controls a corporation? Stockholders or shareholders who own stock in the corporation Part II: Explain and apply underlying accounting concepts, assumptions, and principles (LO2) 16. Two professional frameworks for the measurement and disclosure of financial information are: a. Generally Accepted Accounting Principles (GAAP) b. International Financial Reporting Standards (IFRS) 17. What regulatory bodies formulate the standards for each respective framework in Question 16 above? Financial Accounting Standards Board (FASB); International Accounting Standards Board (IASB) 18. Fill in the conceptual foundation of accounting in the following diagram. Also draw arrows where appropriate to show relationships. 19. In your own words, describe the difference between relevance and faithful representation. Relevance means that the information could change the outcome or make a decision maker chose a different path. If information would have no impact on the decision, then it is not relevant. If the information could change the decision makers mind, it is relevant. Faithful representation means that the information is accurate. Faithful representation makes the information reliable for decision makers to use it. 20. List and describe the four enhancing qualitative characteristics for accounting information. a. Comparability: capable of being compared with information from other companies in the same period b. Verifiability: capable of being checked for accuracy, completeness, and reliability c. Timeliness: made available to users early enough to help them make decisions d. Understandability: transparent and clear enough so that it would make sense to the reasonably informed user of information 21. List and describe the four accounting assumptions/principles. a. Entity Assumption: This is the idea that the entity (organization or person) stands apart as a separate economic unit. It is to keep entities and their affairs separate from others. b. Continuity (Going-Concern Assumption): This says that a business should stay in business  long enough to convert its inventories and receivables to cash, pay off liabilities regularly, and continue operations in the future. c. Historical Cost Principle: This states that assets should be recorded at the cost paid for them in cash and noncash compensation on the date of purchase. d. Stable-Monetary-Unit Assumption: This ignores inflation and change in purchasing power to assume that the value of the dollar is stable over time. This helps with comparability from year to year. 22. _________________ is the amount that the business could sell the asset for, or the amount that the business could pay to settle the liability. Fair value 23. Why did the International Accounting Standards Board (IASB) develop International Financial Reporting Standards (IFRS)? The purpose was to create a uniform set of principles across the developed world and make comparability of financial results simple and inexpensive. Part III: Apply the accounting equation to business organizations (LO3) 24. Assets are economic resources that are expected to produce a _____________________ in the future. Liabilities are debts that are payable to _____________________. Owners’ equity represents the _____________________ claims of a business. Benefit; Outsiders/Creditors; Insider 25. What is the accounting equation? Assets = Liabilities + Owners’ (Stockholders’) Equity 26. ________________ are liquid assets that can be readily converted to cash. Give 2 examples. Cash equivalents Certificate of deposit, U.S. treasury bill 27. Liabilities payable beyond __________________ from the date of the financial statements are long-term. Liabilities payable within __________________ from the date of the financial statements are short-term. One year; One year 28. What are the two main subparts of stockholders’ equity and what is the difference between them? Paid-in capital: the amount the stockholders have invested in the corporation  Retained earnings: the amount earned by income-producing activities and kept for use in the business The main difference is that paid-in capital comes from the stockholders while retained earnings is from the operations of the business. 29. Dividends (ARE or ARE NOT) expenses. They (NEVER or ALWAYS) affect net income ARE NOT; NEVER 30. When a company’s total revenues exceed total expenses, what is the result? When total expenses exceed total revenues? Net income/net earnings/net profit; Net loss 31. How is retained earnings calculated? Retained earnings = Revenues – Expenses – Dividends Or Retained earnings = Net income (net loss) – Dividends Part IV: Construct financial statements and analyze the relationships among them (LO4) 32. You can determine how well the company performed during the year by looking at its ___________________. You can determine a company’s financial position by looking at its ___________________. Income statement; balance sheet 33. A company’s fiscal year always corresponds to a calendar year (January 1—December 31). TRUE or FALSE False 34. An income statement reports two main categories. What are they? Revenues and gains; expenses and losses 35. What is the single most important item in the financial statements? Net income 36. Selling, general, administrative, and other expenses are the costs of everyday operations that are not directly related to performing services or selling products. TRUE or FALSE True 37. Income taxes are not taken into consideration on the income statement. TRUE or FALSE False 38. What does the statement of the retained earnings show about a company?  The statement of retained earnings shows the portion of net income that a company has retained over the years. If the company has been profitable, it will have a positive balance in retained earnings. If it has had losses, then its retained earnings will be in a deficit. The statement of retained earnings also shows if the company has distributed dividends. 39. Who decides whether to pay a dividend to the stockholders? The board of directors 40. List the three items (sections) on a balance sheet a. Assets b. Liabilities c. Stockholders’ Equity 41. Put the following assets in order of liquidity: equipment, cash, inventory, and short-term investments. Cash, Short-term investments, Inventory, Equipment 42. When the term “net” is used on a financial statement regarding property and equipment, it means that the historical acquisition cost of the assets has been reduced by ________________ ________________________. Accumulated depreciation 43. ____________________ assets have no physical substance; you can neither see nor touch them. Intangible 44. Unearned royalties (revenues) represents cash received in advance of performing services or shipping goods and is a liability account. TRUE or FALSE True 45. Describe additional paid-in capital in your own words. Additional paid-in capital is the excess amount over par shareholders pay for securities of a company. 46. ____________________ stock represents amounts paid by the company to repurchase its own stock. Treasury 47. Operating activities show how the company operates by selling ___________ and ___________ to customers. Investing activities show a company’s investment in ______-______ ___________. Financing activities include _______________________________________________. Goods; services; long-term assets; issuing stock, paying dividends, borrowing, and repaying borrowed funds.  48. How is a cash payment indicated on the statement of cash flows? They are enclosed by parentheses to show a negative amount. 49. If you were considering investing in The Walt Disney Company, what should you look for? Students’ answers will vary. Possibilities include:  Can the company sell its services and products?  Look at revenue on the income statement  What are the main income measures and trends?  Calculate and analyze gross profit, operating income, and net income  What percentage of revenue ends up as profit?  Divide net income by sales revenue  Can the company pay its current and long-term liabilities?  Compare assets to liabilities on the balance sheet (both current and long-term)  Where is the company’s cash coming from and how is it being used?  Examine the statement of cash flows Part V: Evaluate business decisions ethically (LO5) 50. Describe ethics in your own words. Answers will vary. Ethics are shaped by our own background and experiences. They are like our morals. What is legal may not always be the most ethical thing to do. 51. List and describe the three types of factors that influence business and accounting decisions. a. Economic factor: the decision should be made to maximize economic benefits to the decision maker b. Legal factor: based on the proposition that free societies are governed by laws c. Ethical factor: recognizes that while certain actions might be both economically profitable and legal, they still may not be right 52. Ethics is a practice that does not have to be taken seriously in accounting. TRUE or FALSE False 53. The four core values of the Business Ethics Leadership Alliance include __________________, transparency, __________ ________, and accountability. Legal compliance; conflict identification 54. A good decision framework for making ethical judgements would be the following:  Ask yourself, what is the issue?  Identify who the stakeholders are and what the consequence of the decision would be to each of them.  Weigh the alternatives.  Make the decision and prepare yourself to deal with the consequences. This can be simplified into three questions. (1) Is the action legal? (2) Who will be affected and how? (3) How will this decision make me feel after? How would it make me feel if my family reads about it in the newspaper? 55. List the basic principles of the American Institute of Certified Public Accountants Code of Professional Conduct. a. Responsibilities principle b. Public interest principle c. Integrity principle d. Objectivity and independence principle e. Due care principle f. Scope and nature of services