A.1. Financial Statements and Reporting Basics Flashcards

Question

What is **owners' equity**?

Answer 1

The **ownership interest** in a business, representing the difference between the company’s assets and its liabilities. ## Footnote Equity is increased by net income and investments by owners and decreased by net losses and distributions to owners.

Answer 2

* Capital stock * Additional paid-in capital * Retained earnings * Accumulated other comprehensive income items * Noncontrolling interest * Treasury stock (a contra-equity account)

Answer 3

To provide information on **assets**, **liabilities**, and **stockholders’ equity**; and to provide a basis for computing rates of return, evaluating the capital structure of the business, and predicting future cash flows.

Answer 4

It does not report the company’s **true value** due to unreported assets, historical cost valuation, and use of estimates.

Answer 5

The change in **equity** (net assets) of a company during a period from transactions and other events from nonowner sources, including net income and other comprehensive income.

Answer 6

* Revenues * Expenses * Gains * Losses

Answer 7

* **Revenues and expenses** result from delivering or producing goods or providing services * **Gains and losses** result from exchange transactions, holding gains and losses, or events like natural catastrophes.

Answer 8

They are those considered to be of an unusual nature or **infrequent occurrence**; and they are reported as non-operating gains and losses within income from continuing operations.

Answer 9

A **component** of a company that is held for sale or has been disposed of, that represents a strategic shift that has or will have a major effect on operations and financial results.

Answer 10

Intra-period tax allocation is the allocation of total income tax expense among income from continuing operations, discontinued operations, and accumulated other comprehensive income within the same reporting period.

Answer 11

It helps users to: * predict future cash flows * evaluate past performance * predict future performance * assess the risk or uncertainty of achieving future cash flows

Answer 12

Limitations arise from its **periodic nature**, as some transactions may be incomplete at the financial statement date; and net income is affected by **estimates** and **accounting methods** used.

Answer 13

Everything on the income statement plus other specific items not appearing on the income statement, known as other comprehensive income.

Answer 14

The balance sheet account in the **equity section** where certain items of revenues, expenses, gains, and losses not reported in net income are recorded.

Answer 15

It reports both net income and other comprehensive income.

Answer 16

Either in a **single continuous** financial statement or in **two separate** but consecutive financial statements.

Answer 17

* Foreign currency translation adjustments. * Gains and losses on foreign currency transactions designated as and effective as economic hedges of a net investment in a foreign entity * Gains and losses on intra-entity foreign currency transactions of a long-term investment nature. * Gains and losses on derivative instruments that are designated as and qualify as cash flow hedges. * Unrealized holding gains and losses on available-for-sale debt securities. * Gains or losses associated with pension or other postretirement benefits.

Answer 18

It reports the changes in each account in the stockholders’ equity section of the balance sheet and in total stockholders’ equity during the year.

Answer 19

They **supplement** and **explain the information** presented on the face of the financial statements, providing a thorough picture of a company’s **financial position and results of operations**.

Answer 20

They provide additional relevant information that can be important to fully understanding the financial statements. ## Footnote Notes are not considered part of a full set of financial statements according to FASB’s Statement of Financial Accounting Concepts No. 8, Chapter 7. They are a required part of general purpose financial reporting, however.

Answer 21

* Assets * Liabilities * Equity/net assets * Comprehensive income * Investments by owners * Distributions to owners * Cash flows during the period

Answer 22

To identify and describe the **principles of accounting** being followed by the company and the methods used for applying the principles that materially affect the presentation of the company’s financial position, cash flows, and results of operations.

Answer 23

A summary of significant accounting policies.

Answer 24

* The basis of consolidation used * Depreciation method(s) used * Information on amortization of intangibles * Inventory pricing * Recognition of revenue from contracts with customers * Recognition of revenue from leasing operations

Answer 25

To provide information regarding **cash receipts** and **cash payments** made by the company during a period.

Answer 26

* Operating activities * Investing activities * Financing activities

Answer 27

The total of cash, cash equivalents, restricted cash, and restricted cash equivalents.

Answer 28

A **highly liquid, short-term investment** that is easily converted into a known amount of cash without significant loss in value. ## Footnote Cash equivalents usually include only those investments that have a maturity of 3 months or less from the date the company acquires the investment.

Answer 29

* Money market funds * Commercial paper * Treasury Bills

Answer 30

Cash inflows and cash outflows that generally involve **producing and delivering goods and providing services**.

Answer 31

* Cash received from customers from sales of goods or services * Cash receipts—interest and dividends—from returns on loans, other debt instruments, and equity securities owned * Cash paid to suppliers to acquire materials for manufacture or goods for resale * Cash payments to other suppliers and employees * Cash paid to governments for taxes and other fees * Cash interest paid on bonds payable and other debt

Answer 32

Activities the company undertakes to **generate a future profit from investments**, including making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment.

Answer 33

* Receipts from collections or sales of loans made by the company * Receipts from sales of equity instruments of other companies and from returns on investment in those instruments * Receipts from sales of property, plant, and equipment * Disbursements for loans made by the company * Payments to purchase equity instruments of other companies * Payments to acquire property, plant, and equipment * Payments made by an acquirer to settle a contingent consideration liability made soon after a business combination * Principal portion of lease payments received by a lessor from lessees on sales-type and direct financing leases

Answer 34

* Proceeds from issuance of stock * Proceeds from issuing bonds, mortgages, notes, and other borrowings * Payments of cash dividends or other distributions to owners * Payments to reacquire the company’s equity instruments (treasury stock) * Principal repayments made to creditors * Payments for debt issue costs * Payments for debt prepayment or debt extinguishment costs * Repayment of the principal portion of finance lease payments

Answer 35

It helps users assess the company's ability to generate positive future cash flows, reasons for differences between net income and associated **cash flows**, the effect of **investing and financing transactions**, the company's ability to meet its **obligations**, and its need for external financing.

Answer 36

It shows only **cash received and paid out**, requiring interpretation with other financial statements; and the **indirect method** does not show sources and uses of operating cash individually.

Answer 37

Begin with net income as the top line and adjust it to: * Eliminate the noncash items included in net income * Eliminate the non-operating items included in net income * Adjust for changes in operating asset and liability balances * Adjust for changes in trading securities if classified as operating activities.

Answer 38

Noncash items like depreciation and unrealized gains/losses are eliminated by **adding back expenses and deducting gains from net income**.

Answer 39

Gains and losses included in net income from investing and financing activities are eliminated by **subtracting gains and adding losses to net income**. ## Footnote The full cash amounts of the transactions are included in the appropriate SCF categories.

Answer 40

Based on the **nature and purpose** for which the securities were acquired, either as operating activities or investment activities.

Answer 41

* Deduct increases in operating assets from net income, add decreases * Add increases in operating liabilities to net income, deduct decreases * Deduct changes in bond discount/premium amortization accounts that increased net income; add back changes that decreased net income

Answer 42

The amount of the increase in net accounts receivable will need to be **subtracted from net income** to calculate net cash provided by operating activities.

Answer 43

A decrease in the inventory account needs to be **added to net income** to calculate net cash provided by operating activities.

Answer 44

An increase in accounts payable must be **added back to net income** to calculate net cash provided by operating activities.

Answer 45

Amortization of a bond discount **increases** the liability and increases the amount of interest expense reported (which decreases net income), so the amount of the amortization is **added to net income** to calculate net cash provided by operating activities.

Answer 46

Amortization of a bond premium **decreases** the asset and decreases the amount of interest income reported (which decreases net income), so the amount of the amortization is **added to net income** to calculate net cash provided by operating activities.

Answer 47

* Under the **direct method**, each individual line on the income statement is adjusted to present it as a cash amount * Under the **indirect method**, only the net income figure is adjusted to present only the summarized net operating cash flow.

Answer 48

Book Value + Realized Gain (or – Realized Loss) = Cash Received

Answer 49

Neither the **book value** nor the **gain or loss on the disposition** are reported individually in the investing activities section of the SCF. ## Footnote The amount of cash received is reported.

Answer 50

Any realized gain or loss on the sale of fixed assets or investment securities included in net income needs to be **eliminated from net income** when calculating net cash flows from operating activities according to the indirect method.

Answer 51

* Debt converted to equity * Borrowing money to purchase a fixed asset when the lender pays the loan proceeds directly to the seller of the asset * Asset sales financed by the seller * Obtaining a right-of-use asset in exchange for a lease liability * Buying or selling fixed assets for something other than cash * Obtaining a building or other item by gift * Exchanging noncash assets or liabilities for other noncash assets or liabilities

Answer 52

These events may be very important for a **potential investor** to know about. ## Footnote For example, issuing new shares to acquire fixed assets would dilute ownership shares of existing shareholders.

Answer 53

As either a **narrative or summarized** in a supplemental schedule following the cash transactions reported on the Statement of Cash Flows.

Answer 54

No, because it does not represent a cash transaction and does not affect recognized assets or liabilities. ## Footnote A stock dividend is a dividend paid in shares of company stock and affects the components of equity only.

Answer 55

How it determines which items are treated as **cash equivalents**.

Answer 56

* The amount of cash paid for interest (net of amounts capitalized) * The amount of cash paid for income taxes during the period ## Footnote These disclosures are required because the cash paid for interest and income taxes are not reported separately in the SCF when using the indirect method.

Answer 57

No, they are reported individually within the statement of cash flows and need not be reported in a supplemental schedule.

Answer 58

Yes, regardless of whether the direct or indirect method of preparing the operating activities section is used.

Answer 59

Must be provided in a separate schedule.

Answer 60

May be reported within the statement of cash flows, or it may be provided in a separate schedule.

A.1. Financial Statements and Reporting Basics Flashcards

Understand the balance sheet, income statement, comprehensive income, equity, notes, and the statement of cash flows including both direct and indirect methods. (84 cards)