Fundamentals of Accounting - Exam 1 Questions & Answers

*Accounting* - ANSWERSa system that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers Financial Accounting Reports - ANSWERS- Periodic financial statements and related disclosures - external decision makers - creditors, investors, suppliers, customers Managerial Accounting Reports - ANSWERS- Detailed plans and continuous performance reports - internal decision makers - managers *Balance Sheet* - ANSWERS(Statement of Financial Position) reports the amount of assets, liabilities, and stockholders' equity of an accounting entity at a point in time. Structure of Balance Sheet - ANSWERS1. *Name of entity,* Maxidrive Corp. 2. *Title of the Statement,* Balance Sheet. 3. *Specific Date of the Statement,* At December 31, 2010 4. *Unit of Measure* (in thousands of dollars) *Accounting Entity* - ANSWERSthe organization for which financial data are to be collected *Basic Accounting Equation* (Balance Sheet Equation) - ANSWERSAssets = Liabilities + Stockholders' Equity - Assets: economic resources - Liabilities + Stockholders' Equity: sources of financing for the economic resources - Liabilities: from creditors - Stockholders' Equity: from stockholders Financial Position - ANSWERSthe economic resources that the company owns and the sources of financing for those resources Assets - ANSWERSthe economic resources owned by the company; expected to provide future benefits owned by the entity as a result of past transactions Balance Sheet Assets: Cash - ANSWERSthe amount of cash in the company's bank accounts Balance Sheet Assets: Accounts Receivable - ANSWERS- amounts owed by customers from prior sales - promise of future payment - later collected in cash Balance Sheet Assets: Inventories - ANSWERSparts and completed but unsold 'disk drives' (product) Balance Sheet Assets: Plant and Equipment - ANSWERSfactories and production machinery Balance Sheet Assets: Land - ANSWERSland on which the factories are built Liabilities - ANSWERSthe company's debts or obligations Accounts Payable - ANSWERS- on the balance sheet under liabilities - amounts owed to suppliers for prior purchases - Result from the purchase of goods or services from suppliers on credit without a formal written contract (or a note). Notes Payable - ANSWERS- on the balance sheet under liabilities - amounts owed on written debt contracts - result from cash borrowings based on a formal written debt contract with lending institutions such as banks Stockholders' Equity - ANSWERSindicates the amount of financing provided by owners of the business and earnings. Contributed Capital - ANSWERS- On the balance sheet under stockholders equity - amounts invested in the business by stockholders - the investment of cash and other assents in the business by the owners Retained Earnings - ANSWERS- On the balance sheet under stockholders equity - past earnings not distributed to stockholders - the amount of earnings (profits) reinvested n the business (and thus not distributed to stockholders in the form of dividends) The *Income Statement* (Statement of Income, Statement of Earnings, Statement of Operation) - ANSWERS- reports the revenues less the expenses of the accounting period (Revenue - Expenses = Net Income) - reports the accountant's primary measure of performance in a business (profit, net income in accounting) *Accounting Period* - ANSWERS- is the time period covered by the financial statements Elements of the Income Statement: Revenues - ANSWERS- Earned from the sale of goods or services to customers - Normally reported for goods or services that have been sold to a customer *whether or not they have been paid for* (accounts receivable/promise of future payment included) - Various terms are used in income statements to describe different sources of revenue (e.g., provision of services, sale of goods, rental property). *Sales Revenue: cash and promises received from the sale of goods and serves Elements of the Income Statement: Expenses - ANSWERS- Represent the dollar amount of resources the entity used to earn revenues during the period. Expenses reported in one accounting period may actually be paid for in another accounting period. - Some require payment immediately, while others require payment at alert date. - Some may also require the use of another resource, such as an inventory item, which may have been paid for in a prior period. *Cost of goods sold expense: cost to produce disk drives sold *Selling, general, and administrative expense: operating expenses not directly related to production *Research and development expense: expenses incurred to develop new products *Interest expense: cost of using borrow funds Elements of the Income Statement: Net Income (net earnings) - ANSWERS- the excess of total revenues over total expenses. - often called "the bottom line" - If total expenses exceed total revenues, a net loss is reported. - net income normally *does not equal* the net cash generated by operations. *Statement of Retained Earnings* - ANSWERS- reports the way that net income and the distribution of dividends affect the financial position of the company during the accounting period - investors examine retained earnings to determine other the company is reinvesting a sufficient portion of earnings to support further growth Statement of Retained Earnings Equation - ANSWERSBeginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings Elements of the Statement of Retained Earnings: - ANSWERS- *Retained Earnings*, Date (beginning-of-the-year retained earnings) - last period's ending retained earnings - *Net Income* for 20xx - net income reported on the income statement +added+ - *Dividends* for 20xx - dividends declared during the period --Subtracted-- from the net income amount. - *Retained Earnings*, Date (end-of-the-year retained earnings) Relationship among statements - ANSWERS1. Net income from the income statement results in an increase in ending retained earnings on the statement of retained earnings. 2. Ending retained earnings from the statement of retained earnings is one of the two components of stockholders' equity on the balance sheet. 3. The change in cash on the cash flow statement added to the beginning-of-the-year balance in cash equals the end-of-the-year balance in cash on the balance sheet. Exhibit 1.6 (p. 17) Net Income earned during the year increases the balance of retained earnings, showing the relationship of the income statement to the balance sheet. The declaration of dividends to the stockholders decreases retained earnings. - retained earnings statement indicates the relationship of the income statement to the balance sheet. *Statement of Cash Flows* (Cash Flow Statement) - ANSWERSreports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing. *Cash Flow Statement Equation* - ANSWERS+/- Cash Flows from Operating Activities (CFO) +/- Cash Flows from Investing Activities (CFI) +/- Cash Flows from Financing Activities (CFF) ________________________________________________________ *Change in Cash* Cash Flows from Operating Activities Examples? - ANSWERScash flows that are directly related to earning income (e.g., cash collected from customers, cash paid to suppliers and employees, cash paid for interest, cash paid for taxes). Cash Flows from Investing Activities - ANSWERScash flows related to the acquisition or sale of the company's productive assets. (e.g., cash paid to purchase manufacturing goods) Cash Flows from Financing Activities - ANSWERSCash flows from the investors and creditors. Directly related to he financing of the enterprise itself. They involve the receipt pr payment of money to investors and creditors (except for suppliers) (e.g., Cash received from bank loan, cash paid for dividends) *Notes* (Footnotes) - ANSWERSprovide supplemental information about the financial condition of a company, without which the financial statement cannot be fully understood. *Purpose*, *Structure* & *Examples of Content* for Balance Sheet (Statement of Financial Position) - ANSWERSReports the financial position (economic resources and sources of financing) of an accounting entity at a point in time. *ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY* Examples of Content: cash, accounts receivable, plant and equipment, notes payable, contributes capital. Ex of Title/heading: Maxi drive Corp. [*name of the entity*] Balance Sheet [*title of the statement*] At December 31, 2010 [*SPECIFIC DATE OF THE STATEMENT*] (in thousand of dollars) [*unit of measure*] *Purpose*, *Structure* & *Examples of Content* for Income Statement (Statement of Income, Statement of Earnings, Statement of Operations) Heading/Title example - ANSWERSReports the accountant's progeny measure of economic performance during the accounting period _ *REVENUES* *EXPENSES* ----------------------------- *NET INCOME* ================= examples of content: sales revenue, cost of goods sold, selling expense, interest expense Ex of Title/heading: Maxi drive Corp. [*name of the entity*] Income Statement [*title of the statement*] For the Year Ended December 31, 2010 [*accounting period*] (in thousand of dollars) [*unit of measure*] *Purpose*, *Structure* & *Examples of Content* for Statement of Retained Earnings Heading/Title example - ANSWERSReports the way that net income and the distribution of dividends have affected the financial position of the company during etc accounting period. *BEGINING RETAINED EARNINGS* + *NET INCOME* - *DIVIDENDS* ------------------------------------------------------- ENDING RETAINED EARNINGS =============================== examples of content: Net income is taken from the income stamens; dividends are distributions to stockholders Ex of Title/heading: Maxi drive Corp. [*name of the entity*] Statement of Retained Earnings [*title of the statement*] For the Year Ended December 31, 2010 [*accounting period*] (in thousand of dollars) [*unit of measure*]