acc200 exam 1

What is the primary purpose of financial accounting?

Measure business activities and communicate those measures to external users to make decisions

True or false, the primary functions of financial accounting are to measure business activities of a company and to communicate those measurements to internal parties for decision-making purposes.

False

Which definition below best describes financial accounting?

Measuring business activities and communicating them to external parties

Which statement below best describes the accounting equation?

The total resources of the company equals creditors' and owners' claims to those resources. (Assets = Liabilities + Stockholders' Equity.)

Dividends represent:

Distributions (most often cash) to the owners of the company.

How to calculate beginning retained earnings

Beginning Retained Earnings = Ending Retained Earnings − Total Net Income + Total Dividends

How to calculate stockholders’ equity

Total Stockholders’ Equity = Common Stock + Retained Earnings

The financial statement that represents activity over the entire life of the company is the:

Balance sheet

While many financial accounting numbers have an impact on stock prices, which of the following has the single greatest impact, on average?

Net income

Which of the following best represents value created for stockholders during the current period?

Net income

GAAP is an abbreviation for:

Generally accepted accounting principles.

To ensure that management has in fact appropriately applied GAAP, the SEC requires independent outside verification of the financial statements of public traded companies by an:

Auditor.

The independent, private-sector group that is primarily responsible for setting financial reporting standards in the United States is the:

FASB (financial accounting standards board)

Current assets include cash and all other assets expected to become cash or be consumed within:

one year or one operating cycle, if longer than one year.

Cash equivalents would include:

Highly liquid investments that can be quickly converted to cash.

Which financial statement provides information for a point in time only?

Balance sheet

What is a current asset

Short-term resources that a business expects to use, sell, or turn into cash within one year.

Retained earnings formula

Total assets - total liabilities - common stock

Which of the following potentially limits the usefulness of the balance sheet?

All of the other answer choices represent potential limitations of the balance sheet. (Many valuable resources of the company are not recorded as assets, Many items in the balance sheet reflect estimates and judgments of management, Property, plant, and equipment are recorded at their book values rather than fair values)

The relationship between revenue from selling inventory and the cost of that inventory is measured as:

gross profit.

When a retail store sells real estate properties for less than their book value, the difference is reported as a(n):

Loss

The measure of profit reported on a multiple-step income statement that represents the primary-revenue generating activities of the company is:

operating income.

Limitations of the income statement include:

All of the other answer choices are correct. (the potential misuse of estimates and judgments, the inclusion of recurring and nonrecurring items can complicate an investor’s ability to predict future income, it is difficult to determine how much tax expense relates to operating and nonoperating items)

Which of the following is a nonrecurring item on the income statement?

Unusual charge related to a natural disaster

Cash flows from investing activities do not include:

proceeds from issuing bonds.

Operating cash outflows would include:

Purchases of inventory.

The statement of stockholders’ equity reports:

All of the other answer choices are correct. (net income from the income statement, the proceeds of the issuance of common stock during the current period, distributions to owners (dividends) during the current period)

The statement of stockholders’ equity includes which of the following for the period?

Changes in the various stockholders’ equity accounts (contributed capital, retained earnings, and accumulated other comprehensive income)

Examples of operating activities

money from customers, paying taxes/utilities or rent, marketing/advertising fees, providing services to customers, purchasing inventory

examples of investing activites

purchasing plant or equipment, cash from sale of investments, cash paid to purchase securities

examples of financing activities

issuing stocks or bonds, selling stock, receiving cash from loans or banks, purchasing stock, payments on loans, paying cash dividends

what is limited liability

stockholders are not personally liable for the financial obligations of the corporation

what is accounts payable

short-term money a business owes to its vendors or suppliers for goods and services received on credit

five primary financial statements

statement of cash flows, statement of comprehensive income, income statement, statement of stockholders equity, balance sheet

what does an income statement report

expenses, net income or loss, revenues

what is the purpose of an income statement

report the profit-generating activities of a company over an interval of time

what should the header of an income statement include

accounting period covered by the statement, name of the business, title of the financial statement

what appears on an income statement

header, salaries expense, service revenue, supplies expense, gross profit, operating income, pretax income, net income, underlines,

what appears on statement of stockholders equity

header, retained earnings, common stock, dividends, total stockholders equity

resources owned by a company are called

assets

what are the two sources of stockholders equity

paid in by shareholders, earned by the corporation

what are retained earnings

total net income earned over the life of the company that has not been distributed as dividends

what is on a balance sheet

accounts receivable, utilities payable, common stock, notes payable, equipment

what items are found on a balance sheet

liabilities, assets, stockholders equity

what is the purpose of a statement of cash flows

to provide information about the cash receipts and cash disbursements during a period

what is the financial statement that reports changes in equity that arise from transactions with nonowners

statement of comprehensive income

what is on a statement of cash flows

operating, investing, financing activities

where is companies stock price performance information found

income statement

how do companies communicate information about their business activites

financial statements

what is the legal authority that sets accounting and reporting standards for companies whose securities are publicly traded

SEC

the primary focus for financial accounting is to provide

investing and credit decisions

which kind of statement reveals a companys debt to investors and creditors

balance sheet

which is value created for stockholders during the current period

net income

the most important objective for financial accounting is to provide useful information for

predicting cash flows

what is an adverse opinion

indicates that the financial statements are grossly misstated, do not present a fair view, and fail to follow accounting standards.

what is an unqualified opinion

the financial statements are fairly presented in all material respects and comply with GAAP

what is a qualified opinion

issued when the financial statements are mostly fair, but the auditor found a specific exception or material misstatement that is not pervasive (unqualified with exceptions)

what is a disclaimer of opinion

the auditor cannot complete the audit report or cannot gather enough evidence to form an opinion

is prepaid rent an asset

yes

fair value as a method of asset measurement is defined as

the price that would be received to sell assets in an orderly transaction between market participants on a given day

what are long term assets

land, building, equipment

what is book value

total assets minus total liabilities

two measures of earnings per share required to be calculated by all public companies are called

basic and diluted