ACG 5026 QUESTION AND ANSWERS
Balance Sheet - Answers - A financial statement that reports assets, liabilities, and
owner's equity on a specific date/at a point in time.
Lists the company's investments and sources of financing using the accounting
equation
§ Assets=liabilities+equity
§ Statement of financial position
Statement of Cash Flows - Answers - A financial statement that provides financial
information about the cash receipts and cash payments of a business for a specific
period of time.
§ Operating cash flows differ from net income because of differences in the time that
revenues and expenses are recorded and the time the cash is received and paid
§ Where did the money come from, where did it go
§ Operating, investing, financing
Income Statement - Answers - A financial statement showing the revenue and
expenses for a fiscal period.
Reports the results of a company's operating activities over a period of time
§ Revenues-expenses=net income
§ Statement of income, statement of earnings, statement of operations, statement of
profit and loss
statement of stockholders' equity - Answers - a financial statement that shows changes
in a corporation's ownership for a fiscal period
Contributed capital
· Amounts from issuing new stock during the period
· Common stock and additional paid-in capital
§ Retained earnings
· Cumulative income since the company began business minus dividends paid out to
shareholders
§ Other stockholders' equity changes
GAAP (Generally Accepted Accounting Principles) - Answers - § Standards and
accepted practices designed to guide the preparation of financial statements
§ Based on underlying principles
§ Allows considerable discretion in preparation
§ Enables external users to rely on audited financial statements
,§ FASB - Answers - private organization setting rules under the offices of the
government (SEC)
o Currently establishes accounting standards in the US
o Developed a conceptual framework to serve as a guide for accounting issues not
covered by standards
SEC (Securities and Exchange Commission) - Answers - final say on accounting
Securities act of 1934 led to the SEC
o Regulates the issuance and trading of securities in the US
o Companies with more than $10 million of assets and whose securities are held by
more than 500 owners must file annual and other periodic reports with the SEC
§ Auditor's report - Answers - · The auditor's report is a statement to the board of
directors of the company and to the shareholders of the company by an independent
auditor
· It expresses an opinion as to whether the financial statements present fairly the
financial activities of the company and whether the financials were prepared in
accordance with GAAP
· A "clean" audit opinion indicated that the auditors do believe the financial statements
present fairly the economic conditions of the firm. It does NOT state that the statements
are "Accurate"
· Adverse opinion- something is wrong
· Going concern opinion- this company may not be around for long, even though it is
correct
· Clean report- presented fairly
o Regulation and oversight SOX - Answers - § Sarbanes-Oxley act of 2002
· Developed by Congress due to concerns over the quality of corporate financial
reporting
· Goal was to increase the level of confidence that external users have in financial
statements
· SOX then established the Public Accounting Oversight Board (PCAOB) to approve
auditing standards and to monitor the quality of financial statements and audits (GAAP)
· SOX means accounting is not self-regulated
Matching Principle (Expense Recognition) - Answers - § Matching focuses on the timing
of recognition of expenses after revenue recognition has been determined
§ This principle states that the efforts of a given period (expenses) should be matched
against the benefits (revenues) they generate
§ For example, the cost of inventory is initially capitalized as an asset on the balance
sheet; it is not recorded in Cost of Goods Sold (expense) until the sale is recognized
§ Important to accrual accounting
, Accrual Accounting - Answers - revenues accounted when we earn them, expenses
accounted when they occur
o Matching determines when expenses are put on the income statement
Constructing a Balance Sheet - Answers - Assets
§ Assets - Answers - Resources that are expected to provide a company with future
economic benefits. Expenditures not capitalized are "Expensed" on the income
statement
o Capitalize means call it an asset
o Assets are cash, A/R, inventory
§ Help us beyond the current year, tangible, intangible (goodwill, copyrights, etc)
current assets - Answers - § Assets are expected to be converted into cash or used in
operations within the next year, or within the next operating cycle
§ Listed in order of liquidity
§ Cash- currency, bank deposits, certificates of deposit and other cash equivalents
· Cash equivalents- can be turned to cash quickly
o Ex) savings accounts
§ Marketable securities - Answers - short-term investments that can quickly be sold to
raise cash
§ Accounts receivable - Answers - amounts due to the company from customers arising
from the sale of products or services on credit
§ Inventory - Answers - goods purchased or produced for sale to customers
§ Prepaid expenses - Answers - costs paid in advance for rent, insurance, or other
services
Noncurrent Asset - Answers - § Listed after current assets on the balance sheet
§ Not expected to expire or be converted into cash within one year, or within the next
operating cycle
§ Referred to as long-term assets
Long term financial investments - Answers - investments in debt securities or shares of
other firms that management does not intend to sell in the near future
§ Property, plant and equipment (PPE) - Answers - land, factory, buildings, warehouses,
office buildings, machinery, office equipment, and other items used in the operations of
the company
Balance Sheet - Answers - A financial statement that reports assets, liabilities, and
owner's equity on a specific date/at a point in time.
Lists the company's investments and sources of financing using the accounting
equation
§ Assets=liabilities+equity
§ Statement of financial position
Statement of Cash Flows - Answers - A financial statement that provides financial
information about the cash receipts and cash payments of a business for a specific
period of time.
§ Operating cash flows differ from net income because of differences in the time that
revenues and expenses are recorded and the time the cash is received and paid
§ Where did the money come from, where did it go
§ Operating, investing, financing
Income Statement - Answers - A financial statement showing the revenue and
expenses for a fiscal period.
Reports the results of a company's operating activities over a period of time
§ Revenues-expenses=net income
§ Statement of income, statement of earnings, statement of operations, statement of
profit and loss
statement of stockholders' equity - Answers - a financial statement that shows changes
in a corporation's ownership for a fiscal period
Contributed capital
· Amounts from issuing new stock during the period
· Common stock and additional paid-in capital
§ Retained earnings
· Cumulative income since the company began business minus dividends paid out to
shareholders
§ Other stockholders' equity changes
GAAP (Generally Accepted Accounting Principles) - Answers - § Standards and
accepted practices designed to guide the preparation of financial statements
§ Based on underlying principles
§ Allows considerable discretion in preparation
§ Enables external users to rely on audited financial statements
,§ FASB - Answers - private organization setting rules under the offices of the
government (SEC)
o Currently establishes accounting standards in the US
o Developed a conceptual framework to serve as a guide for accounting issues not
covered by standards
SEC (Securities and Exchange Commission) - Answers - final say on accounting
Securities act of 1934 led to the SEC
o Regulates the issuance and trading of securities in the US
o Companies with more than $10 million of assets and whose securities are held by
more than 500 owners must file annual and other periodic reports with the SEC
§ Auditor's report - Answers - · The auditor's report is a statement to the board of
directors of the company and to the shareholders of the company by an independent
auditor
· It expresses an opinion as to whether the financial statements present fairly the
financial activities of the company and whether the financials were prepared in
accordance with GAAP
· A "clean" audit opinion indicated that the auditors do believe the financial statements
present fairly the economic conditions of the firm. It does NOT state that the statements
are "Accurate"
· Adverse opinion- something is wrong
· Going concern opinion- this company may not be around for long, even though it is
correct
· Clean report- presented fairly
o Regulation and oversight SOX - Answers - § Sarbanes-Oxley act of 2002
· Developed by Congress due to concerns over the quality of corporate financial
reporting
· Goal was to increase the level of confidence that external users have in financial
statements
· SOX then established the Public Accounting Oversight Board (PCAOB) to approve
auditing standards and to monitor the quality of financial statements and audits (GAAP)
· SOX means accounting is not self-regulated
Matching Principle (Expense Recognition) - Answers - § Matching focuses on the timing
of recognition of expenses after revenue recognition has been determined
§ This principle states that the efforts of a given period (expenses) should be matched
against the benefits (revenues) they generate
§ For example, the cost of inventory is initially capitalized as an asset on the balance
sheet; it is not recorded in Cost of Goods Sold (expense) until the sale is recognized
§ Important to accrual accounting
, Accrual Accounting - Answers - revenues accounted when we earn them, expenses
accounted when they occur
o Matching determines when expenses are put on the income statement
Constructing a Balance Sheet - Answers - Assets
§ Assets - Answers - Resources that are expected to provide a company with future
economic benefits. Expenditures not capitalized are "Expensed" on the income
statement
o Capitalize means call it an asset
o Assets are cash, A/R, inventory
§ Help us beyond the current year, tangible, intangible (goodwill, copyrights, etc)
current assets - Answers - § Assets are expected to be converted into cash or used in
operations within the next year, or within the next operating cycle
§ Listed in order of liquidity
§ Cash- currency, bank deposits, certificates of deposit and other cash equivalents
· Cash equivalents- can be turned to cash quickly
o Ex) savings accounts
§ Marketable securities - Answers - short-term investments that can quickly be sold to
raise cash
§ Accounts receivable - Answers - amounts due to the company from customers arising
from the sale of products or services on credit
§ Inventory - Answers - goods purchased or produced for sale to customers
§ Prepaid expenses - Answers - costs paid in advance for rent, insurance, or other
services
Noncurrent Asset - Answers - § Listed after current assets on the balance sheet
§ Not expected to expire or be converted into cash within one year, or within the next
operating cycle
§ Referred to as long-term assets
Long term financial investments - Answers - investments in debt securities or shares of
other firms that management does not intend to sell in the near future
§ Property, plant and equipment (PPE) - Answers - land, factory, buildings, warehouses,
office buildings, machinery, office equipment, and other items used in the operations of
the company
