A304 EXAM 1 STUDY GUIDE
Principal-Agent Problem - Answers :Arise when the principal delegates authority and
responsibility to an agent and the interests of the agent and principal are in conflict
Conflicting Incentives - Answers :What's best for the principal may not be what's best for
the agent
Information Asymmetry (Adverse Selection and Moral Hazard) - Answers :When one
party (often the agent) has more information than the principal
Financial information can be used by investors to avoid...? - Answers :Information
asymmetry by providing valuable financial information to help make decisions
Moral Hazard - Answers :Is when one party in a transaction (the principal or agent)
assumes additional risks that negatively affect the other party. It can exist when one
party takes a risk but does not have to suffer the consequences
Principal is the...? - Answers :Hirer/Owners/Investors
Agent is the...? - Answers :Employee/Management
Financial reporting reduces...? - Answers :Information Asymmetry
Investors/Owners (principals) use financial reporting to? - Answers :Monitor their
company and make investment decisions
Management/Employees us financial reporting to? - Answers :Attract
investments/resources to the company and secure their employment
The objective of financial reporting is to? - Answers :Provide financial information useful
to existing and potential investors, lenders, and other creditors in making decisions
about providing resources to the entity
Users are interested in information to help them access the...? - Answers :Amounts,
timing, and uncertainty of a business' future cash inflows and outflows
Balance Sheet - Answers :Reports the financial position (amount of assets, liabilities,
and stockholders' equity) of an accounting entity at a POINT in time. Statement of
financial position.
Income Statement - Answers :Reports the revenues less the expenses during the
accounting period. Statement of Operations. Reports revenues, expenses, and net
income over a given period of time.
, Statement of Stockholders' Equity - Answers :Reports the changes in each of the
company's stockholders' equity accounts, including the change in the retained earning
balance caused by net income and dividends, during the reporting period. (over a period
of time)
Statement of Cash Flows - Answers :reports inflows and outflows of cash during the
accounting period in the categories of operating, investing, and financing
Debt - Answers :Borrowed from creditors (liability)
Equity - Answers :Invested by owners (stockholders' equity)
From the firm's perspective why is debt considered riskier than equity? - Answers :Debt
payments are legal obligations (interest), creditors can force bankruptcy, and creditors
can require sale of assets
How can a company give cash back to its shareholders and what other account would
this affect? - Answers :By paying dividends, and a reduce retained earnings in
stockholders' equity
What are current assets? - Answers :Assets expected to be used or converted to cash
within a year
What is represented by "accounts payable" - Answers :It is created when a company
purchases goods from a supplier on credit instead of with cash
What balance sheet accounts do you suspect are influenced by sales? - Answers :Cash
and Account Receivables
What financial statement can you reconcile retained earnings with? - Answers
:Stockholders' Equity
________ are economic resources owned by the business as a result of past
transactions - Answers :Assets
Cash - Answers :Amount of cash in the company's bank accounts
Accounts Receivable - Answers :Amount owed by customers from prior sales
Inventories - Answers :Parts and completed but unsold products
Plant and Equipment - Answers :Factories and production machinery
Land - Answers :Land on which factories are built
Principal-Agent Problem - Answers :Arise when the principal delegates authority and
responsibility to an agent and the interests of the agent and principal are in conflict
Conflicting Incentives - Answers :What's best for the principal may not be what's best for
the agent
Information Asymmetry (Adverse Selection and Moral Hazard) - Answers :When one
party (often the agent) has more information than the principal
Financial information can be used by investors to avoid...? - Answers :Information
asymmetry by providing valuable financial information to help make decisions
Moral Hazard - Answers :Is when one party in a transaction (the principal or agent)
assumes additional risks that negatively affect the other party. It can exist when one
party takes a risk but does not have to suffer the consequences
Principal is the...? - Answers :Hirer/Owners/Investors
Agent is the...? - Answers :Employee/Management
Financial reporting reduces...? - Answers :Information Asymmetry
Investors/Owners (principals) use financial reporting to? - Answers :Monitor their
company and make investment decisions
Management/Employees us financial reporting to? - Answers :Attract
investments/resources to the company and secure their employment
The objective of financial reporting is to? - Answers :Provide financial information useful
to existing and potential investors, lenders, and other creditors in making decisions
about providing resources to the entity
Users are interested in information to help them access the...? - Answers :Amounts,
timing, and uncertainty of a business' future cash inflows and outflows
Balance Sheet - Answers :Reports the financial position (amount of assets, liabilities,
and stockholders' equity) of an accounting entity at a POINT in time. Statement of
financial position.
Income Statement - Answers :Reports the revenues less the expenses during the
accounting period. Statement of Operations. Reports revenues, expenses, and net
income over a given period of time.
, Statement of Stockholders' Equity - Answers :Reports the changes in each of the
company's stockholders' equity accounts, including the change in the retained earning
balance caused by net income and dividends, during the reporting period. (over a period
of time)
Statement of Cash Flows - Answers :reports inflows and outflows of cash during the
accounting period in the categories of operating, investing, and financing
Debt - Answers :Borrowed from creditors (liability)
Equity - Answers :Invested by owners (stockholders' equity)
From the firm's perspective why is debt considered riskier than equity? - Answers :Debt
payments are legal obligations (interest), creditors can force bankruptcy, and creditors
can require sale of assets
How can a company give cash back to its shareholders and what other account would
this affect? - Answers :By paying dividends, and a reduce retained earnings in
stockholders' equity
What are current assets? - Answers :Assets expected to be used or converted to cash
within a year
What is represented by "accounts payable" - Answers :It is created when a company
purchases goods from a supplier on credit instead of with cash
What balance sheet accounts do you suspect are influenced by sales? - Answers :Cash
and Account Receivables
What financial statement can you reconcile retained earnings with? - Answers
:Stockholders' Equity
________ are economic resources owned by the business as a result of past
transactions - Answers :Assets
Cash - Answers :Amount of cash in the company's bank accounts
Accounts Receivable - Answers :Amount owed by customers from prior sales
Inventories - Answers :Parts and completed but unsold products
Plant and Equipment - Answers :Factories and production machinery
Land - Answers :Land on which factories are built
