Principles of Financial Accounting Exam 1 Questions & Answers

Accounting - ANSWERSis the process of identifying, measuring, recording, and communicating financial information about a company's business activities so decision makers can make informed decisions. Users of Accounting Information - ANSWERS1. Managers 2. Employees 3. Investors 4. Creditors 5. Government Business Forms - ANSWERS1. Sole Proprietorship 2. Partnership 3. Corporation Business Activities - ANSWERS1. Financing Activities 2. Investing Activities 3. Operating Activities Financing Activities - ANSWERSObtaining funds to start a business (from owners or creditors. Investing Activities - ANSWERSBuying assets which are used to generate revenues. Operating Activities - ANSWERSOperating the business to earn a profit Companies prepare four basic financial statements: - ANSWERS1. Balance Sheet 2. Income Statement 3. Retained earnings statement 4. Statement of cash flows Balance Sheet - ANSWERSreports the resources owned by a company (assets) and the claims against those resources (liabilities and stockholders' equity) at a specific point in time. Income statement - ANSWERSreports how well a company has performed its operations (revenues, expenses, and net income/loss) over a period of time. Retained earnings statement - ANSWERSreports how much of the company's income was retained in the business and how much was distributed to owners over a period of time. Statement of cash flows - ANSWERSreports the sources and uses of a company's cash over a period of time. Generally accepted accounting principles (GAAP) - ANSWERSwere developed by several different organizations over a number of years. In the United States, the Securities and Exchange Commission (SEC) has the power to set - ANSWERSaccounting rules for publicly traded companies. SEC has delegated this authority to the - ANSWERSFinancial Accounting Standards Board (FASB). While the FASB is the primary accounting standard setter in the United States, the FASB has been working closely with the - ANSWERSthe International Accounting Standards Board (IASB) in its development of international financial reporting standards (IFRS). Assets = - ANSWERSLiabilities + Stockholder's Equity Total assets must always equal - ANSWERStotal liabilities plus stockholders' equity What are Assets: - ANSWERSCurrent assets: (e.g. , cash, accounts receivable, inventories) Long term investment Property, Plant, and Equipment: (e.g. , land, equipment) Intangible assets: (e.g. , patents, copyrights) What are Liabilities - ANSWERSCurrent liabilities: (e.g., accounts payable, salaries payable) Long term liabilities (e.g., notes payable, bonds payable) What are Stockholder's Equity - ANSWERSContributed capital (e.g., common stock) Retained earnings Working capital - ANSWERSis a measure of liquidity Working Capital = - ANSWERSCurrent Assets - Current Liabilities Working capital signals that a company has - ANSWERSadequate funds with which to pay its current obligations and is expressed in dollar amounts. current ratio - ANSWERSis an alternative measure of liquidity that allows comparisons to be made between different companies Current Ratio = - ANSWERSCurrent Assets ÷ Current Liabilities The income statement consists of two major elements: - ANSWERSrevenues and expenses. Revenues - ANSWERSare the increase in assets that result from the sale of products or services. They include: -Sales revenue from products and services -Interest revenue from investments Expenses - ANSWERSare the cost of resources used to earn revenues during a period. They include: Cost of goods sold or cost of sales, selling, general and administrative expenses, research and development expense, other expense, and income tax expense single-step income statements - ANSWERSthere are only two categories: total revenues and total expenses. multiple-step income statement - ANSWERSprovides classifications of revenues and expenses that financial statement users find useful, with three important subtotals: Net Sales Cost of Goods Sold Gross Margin (Gross Profit) Operating Expenses Income from Operations +(-)Non-operating Revenues and Expenses Net Income Investors' and creditors' estimates of the future profitability and growth of a company are aided by a careful examination of how a company has earned its - ANSWERSrevenue and managed its expenses Net profit margin - ANSWERSshows the percentage of profit in each dollar of sales Net Profit Margin = - ANSWERSNet Income ÷ Sales Revenue The owners of a company contribute capital in one of two ways: - ANSWERSDirectly and Indirectly