A304 FINAL STUDY GUIDE
operating activities - Answers :cash inflows and outflows directly related to earnings
from normal operations
-- directly from customers (sale)
-- cash received and paid for interest
-- dividends received on investments
investing activities - Answers :cash inflows and outflows related to the acquisition or
sale of productive facilities and investments in the securities of other companies
-- purchase of long-term assets (plant, property, equipment)
separate entity assumption - Answers :transactions of the business are accounted for
separately from transactions of the owner
going concern assumption - Answers :a business is expected to continue to operate into
the foreseeable future
monetary unit assumption - Answers :financial information is reported in the national
monetary unit without adjustments for changes in purchasing power
historical cost principle - Answers :financial statement elements should be recorded at
the cash-equivalent cost on the date of the transaction; however, these values may be
adjusted to other amounts, such as market value, depending on certain conditions
assets - Answers :economic resources owned or controlled by a company; they have
measurable value and are expected to benefit the company by producing cash inflows
or reducing cash outflows in the future
liabilities - Answers :measurable obligations resulting from a past transaction; they are
expected to be settled in the future by transferring assets or providing services
stockholders' equity - Answers :residual interest of owners in the assets of the entity
after settling liabilities; the financing provided by the owners (contributed capital) and by
business operations (Earned capital)
what is a business transaction? - Answers :-An exchange of cash, goods, or services for
cash, goods, services, or promises between a business and one or more external
parties to a business (not the exchange of a promise for a promise)
-A measurable internal event, such as adjustments for the use of assets in operations
an account is a... - Answers :standardized format that organizations use to accumulate
the dollar effects of transactions related to each financial statement item
,asset examples: - Answers :cash, accounts receivable, inventory, prepaid expenses,
investments, property (buildings and land), equipment, and intangibles
liability examples - Answers :accounts payable, notes payable, accrued expenses
payable, unearned revenues, and taxes payable
stockholder's equity examples: - Answers :common stock, additional paid-in capital, and
retained earnings
to determine the economic effect of a transaction on an entity in terms of the accounting
equation - Answers :each transaction must be analyzed to determine the accounts (at
least two) that are affected
in an exchange - Answers :the company receives something and gives up something
the accounting equation will stay in balance - Answers :if the accounts, direction of the
effects, and amounts are correctly analyzed
systematic transaction analysis includes - Answers :1- determining the accounts that
were received and were given in the exchange, including the type of each account
(A=L+SE), the amounts, and the direction of the effects
2- determining that the accounting equation remains in balance
journal entries - Answers :express the effects of a transaction on accounts in a debits-
equal-credits format
- The accounts and amounts to be debited are listed first
- Then the accounts and amounts to be credited are listed below the debits and
indented, resulting in debit amounts on the left and credit amounts on the right
- Each entry needs a reference (date, number, or letter)
t-accounts - Answers :summarize the transaction effects for each account
- These tools can be used to determine balances and draw inferences about a
company's activities
a trial balance lists all accounts and their balances - Answers :with debit balances in the
left column and credit balances in the right column
- The two columns are totaled to determine if debits equal credits
classified balance sheets are structured as - Answers :assets, liabilities, stockholders'
equit
assts are categorized as - Answers :current assets (those to be used or turned into cash
within the year, with inventory always considered a current asset)
and noncurrent assets, such as long-term investments, property and equipment, and
intangible assets
, liabilities are categorized as - Answers :current assets (those that will be paid with
current assets)
and long-term liabilities
stockholders' equity are listed as - Answers :common stock (number of shares * par
value per share)
and additional paid-in capital (number of shares * excess of issue price over par value
per share) first
followed by retained earnings (earnings reinvested in the business)
the current ratio (current assets / current liabilities) measures - Answers :a company's
liquidity, the ability of the company to pay its short-term obligations with current assets
financial statements reflect transactions - Answers :transactions are the result of a
company carrying out its operating decisions as it implements its business strategy
an understanding of a company's business strategy - Answers :provides the context for
conducting financial statement analysis
analysts use financial statements to - Answers :understand a company's current and
past performance, as well as to make predictions about future performance
the data reported in a company's financial statements - Answers :can be used for either
time-series analysis (comparing a company or companies over time) or cross-sectional
analysis (comparing similar companies at a point in time)
component percentages - Answers :express each item on a financial statement as a
percentage of a single base amount
the base amount on the income statement - Answers :is net sales
to compute component percentages on the income statement - Answers :each amount
reported is divided by net sales
the base amount on the balance sheet - Answers :is total assets
to compute component percentages on the balance sheet - Answers :each amount is
divided by total assets
component percentages are evaluated by - Answers :comparing them over time or by
comparing them with percentages for similar companies
profitability ratios focus on - Answers :income and how it compares to other amounts
reported on the financial statements
operating activities - Answers :cash inflows and outflows directly related to earnings
from normal operations
-- directly from customers (sale)
-- cash received and paid for interest
-- dividends received on investments
investing activities - Answers :cash inflows and outflows related to the acquisition or
sale of productive facilities and investments in the securities of other companies
-- purchase of long-term assets (plant, property, equipment)
separate entity assumption - Answers :transactions of the business are accounted for
separately from transactions of the owner
going concern assumption - Answers :a business is expected to continue to operate into
the foreseeable future
monetary unit assumption - Answers :financial information is reported in the national
monetary unit without adjustments for changes in purchasing power
historical cost principle - Answers :financial statement elements should be recorded at
the cash-equivalent cost on the date of the transaction; however, these values may be
adjusted to other amounts, such as market value, depending on certain conditions
assets - Answers :economic resources owned or controlled by a company; they have
measurable value and are expected to benefit the company by producing cash inflows
or reducing cash outflows in the future
liabilities - Answers :measurable obligations resulting from a past transaction; they are
expected to be settled in the future by transferring assets or providing services
stockholders' equity - Answers :residual interest of owners in the assets of the entity
after settling liabilities; the financing provided by the owners (contributed capital) and by
business operations (Earned capital)
what is a business transaction? - Answers :-An exchange of cash, goods, or services for
cash, goods, services, or promises between a business and one or more external
parties to a business (not the exchange of a promise for a promise)
-A measurable internal event, such as adjustments for the use of assets in operations
an account is a... - Answers :standardized format that organizations use to accumulate
the dollar effects of transactions related to each financial statement item
,asset examples: - Answers :cash, accounts receivable, inventory, prepaid expenses,
investments, property (buildings and land), equipment, and intangibles
liability examples - Answers :accounts payable, notes payable, accrued expenses
payable, unearned revenues, and taxes payable
stockholder's equity examples: - Answers :common stock, additional paid-in capital, and
retained earnings
to determine the economic effect of a transaction on an entity in terms of the accounting
equation - Answers :each transaction must be analyzed to determine the accounts (at
least two) that are affected
in an exchange - Answers :the company receives something and gives up something
the accounting equation will stay in balance - Answers :if the accounts, direction of the
effects, and amounts are correctly analyzed
systematic transaction analysis includes - Answers :1- determining the accounts that
were received and were given in the exchange, including the type of each account
(A=L+SE), the amounts, and the direction of the effects
2- determining that the accounting equation remains in balance
journal entries - Answers :express the effects of a transaction on accounts in a debits-
equal-credits format
- The accounts and amounts to be debited are listed first
- Then the accounts and amounts to be credited are listed below the debits and
indented, resulting in debit amounts on the left and credit amounts on the right
- Each entry needs a reference (date, number, or letter)
t-accounts - Answers :summarize the transaction effects for each account
- These tools can be used to determine balances and draw inferences about a
company's activities
a trial balance lists all accounts and their balances - Answers :with debit balances in the
left column and credit balances in the right column
- The two columns are totaled to determine if debits equal credits
classified balance sheets are structured as - Answers :assets, liabilities, stockholders'
equit
assts are categorized as - Answers :current assets (those to be used or turned into cash
within the year, with inventory always considered a current asset)
and noncurrent assets, such as long-term investments, property and equipment, and
intangible assets
, liabilities are categorized as - Answers :current assets (those that will be paid with
current assets)
and long-term liabilities
stockholders' equity are listed as - Answers :common stock (number of shares * par
value per share)
and additional paid-in capital (number of shares * excess of issue price over par value
per share) first
followed by retained earnings (earnings reinvested in the business)
the current ratio (current assets / current liabilities) measures - Answers :a company's
liquidity, the ability of the company to pay its short-term obligations with current assets
financial statements reflect transactions - Answers :transactions are the result of a
company carrying out its operating decisions as it implements its business strategy
an understanding of a company's business strategy - Answers :provides the context for
conducting financial statement analysis
analysts use financial statements to - Answers :understand a company's current and
past performance, as well as to make predictions about future performance
the data reported in a company's financial statements - Answers :can be used for either
time-series analysis (comparing a company or companies over time) or cross-sectional
analysis (comparing similar companies at a point in time)
component percentages - Answers :express each item on a financial statement as a
percentage of a single base amount
the base amount on the income statement - Answers :is net sales
to compute component percentages on the income statement - Answers :each amount
reported is divided by net sales
the base amount on the balance sheet - Answers :is total assets
to compute component percentages on the balance sheet - Answers :each amount is
divided by total assets
component percentages are evaluated by - Answers :comparing them over time or by
comparing them with percentages for similar companies
profitability ratios focus on - Answers :income and how it compares to other amounts
reported on the financial statements
