ACCOUNTING EXAM 1

Why is financial accounting important?

It is the 'language of business' and is essential for various careers such as investment banking and management consulting.

What is a business?

A way to organize the production of goods or services, generally for profit.

What are the different types of businesses?

For-profit vs. not-for-profit, corporation vs. partnership, public vs. private.

What is a public corporation?

A corporation that is traded on a stock market.

What do stocks or shares represent?

Fractional ownership in a corporation.

Who are shareholders?

People who own shares in a corporation, often purchased on a stock market.

What is the role of creditors?

Creditors are owed money by corporations and lend money but do not invest in them.

What is the objective of corporations?

To maximize profits.

What is financial accounting?

The process of measuring business activities and communicating these measurements to external stakeholders.

What are operating activities?

Transactions that relate to the primary operations of the company, such as sales to customers and purchases of inventory.

What are financing activities?

Transactions the company has with investors and creditors, like borrowing money or issuing shares.

What are investing activities?

Transactions involving the purchase and sale of resources expected to benefit the company for several years.

What is net income?

The difference between revenues and expenses, also known as earnings or profit.

What are assets?

Total resources of the company that are measurable, such as cash, equipment, and inventory.

What are liabilities?

Amounts owed to creditors, representing claims on the firm's assets.

What is the Accounting Equation?

Assets = Liabilities + Stockholders' Equity.

What are common examples of liabilities?

Notes payable and wages payable.

What is the significance of the Accounting Equation?

It serves as the framework for understanding financial accounting.

What is the role of managers in corporations?

Managers must maximize profits for shareholders by conveying financial performance through accounting.

How do shareholders use accounting information?

To make investment decisions and assess the profitability of their investments.

What is the significance of forecasting earnings?

It helps determine a company's value and informs investment decisions.

What is the difference between revenues and expenses?

Revenues are amounts recognized from sales, while expenses are costs incurred in providing products and services.

What is a key feature of corporations?

The separation of ownership and management, where shareholders own the corporation but managers run it.

What is the worst-case scenario for corporations?

Potential issues like workers being paid less, tax avoidance, or environmental pollution.

Why are most corporations incorporated in Delaware?

Delaware has favorable business laws and expert judges with a long legal precedent.

What is an example of a liability in a contract?

A promise to pay a basketball player $28 million in cash plus $20 million in equity.

What is the relationship between accounting and investment decisions?

Accounting provides the necessary information to forecast earnings and assess investment value.

What is a liability in financial accounting?

A claim by creditors on the resources of a company.

What is the total amount of the liability mentioned?

$48 million.

What term describes a situation where liabilities exceed assets?

Insolvency.

What can insolvent entities declare?

Bankruptcy.

What happened to the Clippers on September 2, 2026?

They were fined $30 million and forfeited five first-round draft picks.

What is equity in the context of homeownership?

The difference between the value of the home and the mortgage.

How is shareholder's equity defined?

The value left after paying off all liabilities or the amount shareholders are entitled to receive if the corporation liquidates.

What are the main types of financial statements?

Balance sheet, Statement of stockholders' equity, Income statement, Statement of cash flows, Statement of comprehensive income.

What does a balance sheet present?

The financial position of the company on a particular date.

What is the Accounting Identity reflected in the balance sheet?

Assets = Liabilities + Stockholders' Equity.

Who might use a balance sheet and why?

Creditors use it to establish collateral and analyze debt; investors use it to assess company resilience.

What does an income statement report?

The company's revenues and expenses over a year.

What would appear in a company's income statement?

Rent Expense.

What relationship is reflected in the balance sheet?

Assets = Liabilities + Stockholders' Equity.

What does the statement of cash flows measure?

Activities involving cash receipts and cash payments over an interval of time.

What are the three types of activities in the statement of cash flows?

Operating, Investing, and Financing activities.

What type of activity is cash collected from a customer recorded as?

Operating Activity.

What should financial accounting decisions be based on?

Formal rules known as accounting standards.

What are Generally Accepted Accounting Principles?

GAAP, the formal standards for financial accounting.

What is the role of investors and creditors in financial accounting?

They make decisions based on financial accounting information.

What is an unsecured creditor?

A creditor who does not have a claim on specific assets of the debtor.

What is the significance of the balance sheet for investors?

It helps establish if assets exceed liabilities, indicating financial health.

What is the formula for shareholder's equity?

Shareholder's Equity = Investment by shareholders + earnings of the company.

What happens if revenues are less than expenses?

The company incurs a net loss.

What is the purpose of the statement of comprehensive income?

To report all changes in equity during a period except those resulting from investments by owners and distributions to owners.

What organizations govern accounting standards in the United States?

The Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC).

What is the role of the International Accounting Standards Board (IASB)?

To develop and promote international financial reporting standards.

What is accounting fraud?

The act of intentionally misrepresenting financial information to deceive stakeholders.

How did Walter White launder money in the show?

He inflated sales at a car wash by mixing legitimate sales with cash from drug sales.

What recent allegations were made against Manchester City?

Accusations of breaching financial rules and inaccurate financial reporting.

What are the penalties for accounting fraud?

Penalties can include fines, sanctions, and legal consequences, but specifics are TBD.

What is the purpose of auditors in financial reporting?

To provide an independent opinion on the accuracy of financial statements and compliance with GAAP.

What are the Big 4 accounting firms?

Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY), and KPMG.

What are the filing requirements for publicly-traded firms?

They must file annual reports (10-K), quarterly reports (10-Q), and current reports (8-K) with the SEC.

What information is included in the Annual Report (Form 10-K)?

Balance sheet, income statement, statement of cash flow, and management discussion and analysis.

What are disclosure notes in a 10-K report?

Notes that provide additional information on significant accounting policies, subsequent events, and related party transactions.

What does Management's Discussion and Analysis (MD&A) include?

Management's views on operations, liquidity, capital resources, and critical accounting estimates.

Why is it important to differentiate between recurring and one-off charges?

It affects projections of cash flows and stock price valuations.

What is included in a quarterly report (Form 10-Q)?

A full set of financial statements, management discussion and analysis, and limited financial notes.

What types of events are reported in a current report (Form 8-K)?

Major events such as quarterly results, acquisitions, or changes in executive leadership.

What is the significance of the SEC's EDGAR database?

It provides free access to the filings of publicly-traded companies.

What is the purpose of a proxy statement?

To disclose compensation information for directors and executives and solicit shareholder votes.

What does the term 'inflated sales' refer to in accounting fraud?

Reporting higher sales figures than actual to mislead stakeholders about a company's financial performance.

What is the impact of auditors on investors' decisions?

They add credibility to financial statements, influencing investment and credit decisions.

What are the consequences of inaccurate financial reporting?

Potential legal action, loss of investor trust, and financial penalties.

What is the role of management in financial reporting?

To prepare accurate financial statements and ensure compliance with accounting standards.

How do auditors help prevent fraud?

By reviewing financial statements for compliance with GAAP and identifying material misstatements.

What is the significance of the Management Discussion and Analysis section?

It provides insights into management's perspective on the company's performance and future outlook.

What does 'related party transactions' mean in financial reporting?

Transactions between the company and parties that have a close relationship, which must be disclosed.

What is the importance of the balance sheet in the 10-K report?

It provides a snapshot of the company's financial position at the end of the fiscal year.

What is the purpose of the income statement?

To show the company's revenues and expenses over a specific period, indicating profitability.

What is the statement of cash flow?

A financial statement that provides information about cash inflows and outflows during a period.

What does the balance sheet report?

A company's financial position at a point in time, including assets, liabilities, and equity.

What are current assets?

Assets expected to provide a benefit within the next year.

What is liquidity?

The convertibility of an asset into cash.

List examples of current asset accounts.

Cash and cash equivalents, accounts receivable, inventory, prepaid expenses.

What defines long-term assets?

Assets expected to provide economic benefits for more than one year.

What are some examples of long-term assets?

Long-term investments, property, plant, and equipment, intangible assets.

What does the income statement report?

Revenues minus expenses equals net income.

What is the first step in transaction analysis?

Identify the first account affected by the transaction.

What are current liabilities?

Obligations expected to be satisfied within one year.

What is accounts payable?

Obligations to suppliers for merchandise or services purchased on account.

Define deferred revenues.

Cash received from customers for goods or services to be provided in the future.

What are accrued liabilities?

Obligations created when expenses have been incurred but not yet paid.

What are long-term liabilities?

Obligations expected to be satisfied in more than one year.

What is stockholders' equity?

Total assets minus total liabilities.

What is the difference between book value and market value?

Book value reflects the company's historical costs, while market value reflects current market conditions and future expectations.

What does a high market value to book value ratio indicate?

Strong growth expectations from the market.

What is goodwill?

An intangible asset that arises from acquisitions of other companies.

What are the three primary sources of stockholders' equity?

Contributed capital, retained earnings, and additional paid-in capital.

How do you record a transaction that increases inventory?

Increase the inventory account and decrease the cash account by the same amount.

What happens to the accounting equation when cash is received from accounts receivable?

Cash increases and accounts receivable decreases by the same amount, keeping the equation balanced.

What is an example of a current asset for Lululemon?

Inventory of athletic apparel.