Financial Accounting Exam 1 Answers

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creditors
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persons or entities to whom a company owes money
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amount owed to creditors
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liabilities
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note payable
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liability to the bank
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bonds payable
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debt securities sold to investors that must be repaid at a particular date some years in the future
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common stock
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the total amount paid in by stockholders for the shares they purchase
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dividends
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payments of cash from a corporation to its stockholders
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assets
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resources owned by a business
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revenue
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the increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business
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supplies
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assets used in day-to-day operations
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inventory
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assets that are goods available for future sales to customers
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account receivable
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the right to receive money in the future
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expenses
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the cost of assets consumed or services used in the process of generating revenues
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accounts payable
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the obligation to pay for goods
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income statement
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to show how successfully your business performed during a period of time, you report its revenues and expenses and show net income or loss for a period of time
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retained earnings statement
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to indicate how much previous income was distributed to you and the owners of your business in the form of dividends in a specific period of time, and how much was retained in the business to allow for future growth
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balance sheet
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to present a picture at a point in time of what your business owns (assets) and what it owes (liabilities)
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statement of cash flows
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to show where your business obtained cash during a period of time and how that cash was used
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stockholders’ equity
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the owners’ claim to assets
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basic accounting equation
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assets = liabilities + stockholders equity
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management discussion and analysis
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presents managements’ views on the company’s ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations
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classified balance sheet
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groups together similar assets and similar liabilities, using a number of standard classifications and sections
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current assets
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assets that a company expects to convert to cash up or use up within one year or its operating cycle, whichever is longer (ex: cash, investments, receivables, inventories, prepaid expenses) –> order of liquidity
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operating cycle
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the average time required to go from cash to cash in producing revenue
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long-term investments
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investments in stocks and bonds of other corporations that are held for more than one year, long-term assets such as land or buildings that a company is not currently using in its operating activities, long-term notes receivable
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Property, plant, and equipment
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assets with relatively long useful lives that are currently used in operating the business
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depreciation
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the allocation of the cost of an asset to a number of years
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accumulated depreciation
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the total amount of depreciation that the company has expensed thus far in the asset’s life
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current liabilities
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obligations that the company is to pay within the next year or operating cycle, whichever is longer (accounts payable, salaries and wages payable, salaries and wages payable, notes payable, interest payable, and income taxes payable)
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long term liabilities
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obligations that a company expects to pay after one year (bonds payable, mortgages payable, long-term notes payable, lease liabilities, pension liabilities)
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Earnings Per Share
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measures the net income earned on each share of common stock (net income-preferred dividends)/avg # of common shares outstanding during the year
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statement of stockholders equity
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presents the causes of changes to stockholders’ equity during the period, including those that caused retained earnings to change
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liquidity
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ability to pay obligations expected to become due within the next year or operating cycle
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working capital
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current assets-current liabilities
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current ratio
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current assets/current liabilities (more dependable than working capital)
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solvency
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ability to pay interest as it comes due and repay the balance of a debt due at its maturity
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solvency rations
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measure the ability of the company to survive over a long period of time
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debt to assets ratio
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(measure of solvency) total liabilities/total assets in percentage
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free cash flow
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net cash provided by operating activities-capital expenditures-cash dividends
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enhancing qualities
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comparability, consistency, verifiability, timeliness, understandability
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monetary unit assumption
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only those things that can be expressed in money are included in the accounting records
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economic entity assumption
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every economic entity can be seperately identified and accounted for
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periodicity assumption
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the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business
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going concern assumption
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the business will remain in operation for the forseeable future
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historical cost principle
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companies record assets at their cost
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fair value principle
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assets and liabilities should be reported at fair value
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full disclosure principle
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companies disclose all circumstances and events that would make a difference to financial statement users
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cost constraint
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weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having information available
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retained earnings
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revenue-expenses-dividends
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general journal
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1. discloses in one place the complete effect of a transaction 2. provides a chronological record of transactions 3. helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared
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ledger
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the entire group of accounts maintained by a company
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trial balance
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lists accounts and their balances at a given time
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revenue recognition principle
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requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied
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expense recognition principle
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match expenses with revenues in the period when the company makes efforts to generate those revenues
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accrual-basis accounting
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transactions that change a company’s financial statements are recorded in the periods in which the events occur
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cash-basis accounting
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companies record revenue when they receive cash (not in accordance with GAAP)
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accrued revenues
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revenues for services performed but not yet recorded at the statement date
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accrued expenses
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expenses incurred but not yet paid or recorded at the statement date (ex: interest, taxes, utilities, salaries)
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temporary accounts
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revenues, expenses, dividends (only relative to given accting period)
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permanent account
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all balance sheet accounts (balances carried forward into future accounting periods)
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auditor’s report
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auditor’s opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with GAAP

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