Principles of Financial Accounting Exam 1 Questions & Answers

What is Accounting? - ANSWERSAccounting is the process of identifying, measuring, recording, and communicating financial information. Why accounting useful? - ANSWERSIt help people answer questions and make better decisions. List the three forms of business. - ANSWERSSole proprietorship, partnership, and corporation. List the three types of business activity. - ANSWERSFinancing Activities, Investing Activities, and Operating Activities. What do financing activities include? - ANSWERSA company's financing activities include obtaining the funds necessary to begin and operate a business. Where do financing funds come from? - ANSWERSEither issuing (selling) stock of borrowing money. Creditor - ANSWERSThe person to whom the corporation owes money. Liability - ANSWERSThe obligation to repay a creditor. Stockholders' Equity - ANSWERSClaims of the stockholders. Investing Activites - ANSWERSThe purchase (and sale) of the assets that are used in operations (commonly referred to as property,plant, and equipment) are a corporation's investing activities. Operating Activities - ANSWERSOperating through use of goods or services that generate revenue and expenses. Revenue - ANSWERSthe increase in assets (cash or receivable) that results from the sale of products or services. Expenses - ANSWERSthe cost of assets used or the liabilities created, in the operation of the business Net income - ANSWERSrevenues are greater than expenses Net loss - ANSWERSexpenses are greater than revenues List the four types of financial statements - ANSWERSBalance sheet, retained earnings, income statement, cash flow 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) - ANSWERScommon set of rules and conventions developed to guide the preparation of financial statements; developed by several different organizations over a number of years. Securities and Exchange Commission (SEC) - ANSWERSIn the U.S., has the power to set accounting rules for publicly traded companies. Financial Accounting Standards Board (FASB) - ANSWERSSEC has delegated authority to FASB; primary accounting standard setter in the U.S., but working closely with International Accounting Standards Board (IASB) to develop the international financial reporting standards (IFRS) Fundamental Accounting Equation - ANSWERSAssets = Liabilities + Stockholders' Equity Operating Cycle - ANSWERSThe average time that it takes a company to purchase goods, resell the goods, and collect the cash from customers. Current Assets - ANSWERSCash and other assets that are reasonably expected to be converted into cash within one year or one operating cycle, whichever is longer. Noncurrent Assets - ANSWERSLong-term investments; property, plant, and equipment; and intangible assets Current liabilities - ANSWERSObligations that will be satisfied, through the payment of cash or by providing goods or services, within one year or the operating cycle Long-term liabilities - ANSWERSObligations of the company that will require payment beyond one year or the operating cycle. Liquidity - ANSWERSThe ability to pay obligations as they become due. Two useful measures of liquidity - ANSWERSworking capital and current ratio Working capital - ANSWERSWorking capital = current assets - current liabilities Signals that a company has adequate funds with which to pay its current obligations and is expressed in dollar amounts. Current ratio - ANSWERSAn alternative measure of liquidity that allows comparisons to be made between different companies. Current ratio = current assets/current liabilities Single-step income statement - ANSWERSOnly two categories: total revenues and total expenses. Does not display the cost of goods sold 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) gross margin (gross profit) - operating expenses = income from operations income from operations +(-) non-operating revenues and expenses = net income Examples of Nonoperating Items - ANSWERSOther Revenues and Gains: -Interest income on investments -Dividend income from investments in stock of other companies -Rent revenue -Gains of disposal of property, plant, and equipment Other expenses and Losses: -Interest expense from loans -Losses from disposal of property, plant, and equipment -Losses from accidents or vandalism -Losses from employee strike -Income taxes expense Net profit margin - ANSWERSA useful measure of a company's ability to generate profit (sometimes called return on sales). Shows the percentage of profit in each dollar of sales. Net profit margin = net income/sales revenue