Financial Accounting Midterm Answers

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Accounting
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system that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers.
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Business activities
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include financing, investing, and operating umbrellas.
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Balance Sheet
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reports the amount of assets, liabilities, and stockholders’ equity of an accounting entity at a point in time
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Basic Accounting Equation
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Assets = Liabilities + Stockholders’ Equity
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The Income Statement
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reports the revenues less the expenses of the accounting period
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The income statement “formula”
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Revenues – expenses = net income
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Accounting period
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Time period covered by the financial statement
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Statement of Stockholders’ Equity
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Reports the way that the net income and the distribution of dividends affected the financial position of the company during the accounting period
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Statement of Cash Flows
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Reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.
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Cash Flow statement “formula”
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+/- CFO +/- CFI +/- CFO = change in cash
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Name the three ways the statements are linked.
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1) Income statement is linked to SSE by net income 2) Statement of Cash Flows linked to BS by cash 3) SSE linked to BS by retained earnings
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True or False: Income statement is linked to the statement of stockholder’s equity by net income
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True
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True of False: Statement of Cash flows is linked to the balance sheet by earnings
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False, cash
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True or False: Statement of Stockholders’ Equity is linked to Balance Sheet by retained earnings
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True
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GAAP
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Generally accepted accounting principles
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Primary objective of financial reporting to external users
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is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity
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relevant information
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can influence a decisions; it has predictive and/or feedback value
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Faithful Representation
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requires that the information be complete, neutral, and free from error
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Separate Entity Assumption
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states that a business’s activities are accounted for separately from those of its owners
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Continuity (going concern) assumption
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states that businesses are assumed to continue into foreseeable future
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Stable monetary unit assumption
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states that accounting information should be measured and reported in the national monetary unit without any adjustment of changes in purchasing power
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Mixed attribute measurement model
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is applied to measuring different assets and liabilities
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Assets
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are probable future economic benefits owned or controlled by an entity as a result of past transactions or events.
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Assets are listed in order of _____ on the BS
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liquidity
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Current Asset
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Will be liquidated or turned to cash with in the year
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Inventory is always __ _____ ______
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a current asset
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Liabilities
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are probable future sacrifices of economic benefits arising from present obligations of a business as a result of past events
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Stockholders’ Equity
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the residual interest in assets of the entity after subtracting liabilities
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Retained Earnings
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are the cumulative earnings of a company that have not been distributed to the owners via dividends and are reinvested in the business
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Transaction
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(1) an exchange of assets or services for assets, services, or promises to pay between a business and one or more external parties to a business or (2) a measurable internal event such as adjustments for the use of assets in operations.
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Transaction Analysis
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the process of analyzing a transaction to determine its economic effect on the fundamental accounting model
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Par Value
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a legal amount per share established by the board of directors: it represents the minimum amount a stockholder must contribute and has no relationship to the market price of the stock
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Common Stock
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account that is equal to the number of shares issued by a corporation times the par value per share
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APIC
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amount of capital contributed by the shareholders less the par value of the stock
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Accounting cycle
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the process followed by entities to analyze and record transactions, adjust the records at the end of the period, prepare financial statements and prepare the records for the next cycle
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Debit
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dr, refers to the left side of a t account
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Credit
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cr, refers to the right side of a t account
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Journal Entry
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an accounting method for expressing the effects of a transaction on accounts in a debit equals credit format
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T account
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a tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company’s activities
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If a board of directors declares the company will pay dividends their retained earnings (SE) _____ and their dividends payable (L) ______
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decreases, increases
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Trial balance
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list of alls counts with their balances to provide a check on the equality of the debits and credits
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Time period assumption
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indicates that the long life of a company can be reported in shorter time periods
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Revenues
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increases in assets or settlements of liabilities from ONGOING operations
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Expenses
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outflows or the using up of assets or increases in liabilities from ongoing operations incurred to generate revenues during the period
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Not all ___ ______ are _________, but ______ are necessary to generate revenue.
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cash expenditures, expenses, expenses
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Gains
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increases in assets or decreases in liabilities from peripheral transaction
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Losses
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decreases in assets or increases in liabilities from peripheral transactions.
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Cash basis accounting
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records revenues when cash is received and expenses when cash is paid
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Accrual Basis Accounting
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records revenues when earned and expenses when incurred, regardless of the timing of cash receipts or payments
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Revenue Realization Principles
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Revenues are recognized when, delivery has occurred or services have been rendered, there is persuasive evidence of an arrangement for customer payment, the price is fixed or determinable, collection is reasonably assured
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Expense Matching Principle
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requires that expenses be recorded when incurred one arming revenue
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Net Profit Margin
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net income / net sales (operating revenues)
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Deferred Revenue
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if cash was received and previously recorded. Debit unearned revenue (L-) and credit revenue (SE+)
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Accrued Revenue
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If cash will be received. Debit receivable (A+) and credit revenue (SE+)
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Deferred expense
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if cash was paid and previously recorded. Debit expense (SE-) and credit prepaid expense (A-)
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Accrued Expense
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If cash will be paid. Debit Expense (SE-) and credit payable (L+)
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Adjusting entries
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necessary at the end of the accounting period to measure all revenues and expenses of that period
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Revenues are recorded when they are _______
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earned (revenue realization principle)
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Expenses are recorded when they are _______
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incurred (expense matching principle)
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Deferred (unearned) revenues
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previously recorded liabilities that need to be adjusted at the end of the accounting period to reflect the amount of revenue earned.
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Accrued rev
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previously unrecorded revenues that need to be adjusted at the end of the accounting period to reflect the amount earned and the related receivable account
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Depreciation
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an allocation of an asset’s cost over its estimated useful life to the organization
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Accumulated Depreciation
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Contra account for PPE for the total cost used to date
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Net Book Value of an asset
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the difference between its acquisition cost and accumulated depreciation, its related contra account
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Report Net Book Value on BS (T or F)
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True
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Corporate governance
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the procedures designed to ensure that the company is managed in the interests of the shareholders
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The sarbanes oxley act
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a law which strengthens U.S. financial reporting and corporate governance regulations. Also called the Public Accounting Reform and Investor Protection Act
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Triangle for Fraud
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there must be an incentive to commit it, opportunity to do it, and the ability to rationalize the misdeed
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the “regulators” for corporate governance
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SEC and stock exchanges
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the “regulators” for accounting standards
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FASB
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the “regulators” for auditing standards
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PCAOB
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SEC
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Securities and Exchange Commission, US government agency that determines the financial statements that public companies must provide to stockholders and the measurement rules that they must use in producing those statements.
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FASB
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The Financial Accounting Standards Board is the private sector body given the primary responsibility to work out the detailed rules that become GAAP
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PCAOB
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The Public Company Accounting Oversight Board is the private sector body given the primary responsibility to issue detailed auditing standards
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unqualified (clean) audit opinion
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an auditor’s statement that the financial statements are fair presentations in all material respects in conformity with GAAP. When a CPA firm signs on they assume part of the financial responsibility for the fairness of the financial statements and presentations
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earnings forecasts
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predictions of earnings for future accounting periods prepared by financial analysts
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Institutional investors
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managers of pension, mutual, endowment, and other funds that invest on the behalf of others
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Private investors
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include individuals who purchase shares in companies
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Creditors or Lenders
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include suppliers and financial institutions that lend money to companies
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Cost effectiveness
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requires that the benefits of accounting for and reporting information outweigh the costs
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Material Amounts
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amounts that are large enough to influence user decisions. Quite subjective to determine
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Annual reports
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relatively simple documents photocopied on white bond paper that include four basic financial statements, related notes, footnotes, and the report of independent accountants (auditor’s opinion) if the statements are audited
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10k
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annual report that publicly traded companies must file with the SEC
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Item 1 on 10k
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Business: description of business operations and company strategy
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Item 6 on 10k
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Selected financial data: summarized financial data for a 5 year period
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Item 7 on 10k
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Management’s discussion and analysis of financial condition and results of operations
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Item 8 on 10k
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Financial statements and supplemental data
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Form 10Q
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quarterly report that publicly traded companies must file with the SEC
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Form 8-k
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used by publicly traded companies to disclose any material event not previously reported that is important to investors
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Deferred revenue shows up in what two places?
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current and noncurrent liabilities
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Gross Profit (gross margin)
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net sales less COGS
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Operating Income or Income from Operations
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net sales less cost of goods sold and other operating expenses
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Income before taxes (pretax earnings)
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revenue minus all expenses except income tax expense
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Earnings per share
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Net income / average number of shares of common stock outstanding during the period
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ROA
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Return on Assets, equals net income / average total assets
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ROA decomposition or dupont analysis or ROA profit driver analysis
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breaks down ROA into two factors, net profit margin and total asset turnover
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Current Ratio
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Current Assets/Current Liabilities
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APIC Formula
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Initial Investment – Common Stock
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Revenues have a ______ balance
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credit
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Expenses have a ________ balance
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debit
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How do rev and exp flow into balance sheet?
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They are closed into retained earnings.
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Revenues ______ retained earnings
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increase
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Expenses __________ retained earnings
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decrease

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