Financial Statements
Name the 4 primary financial statements
Balance Sheet, Income Statement, Statement of Equity, Statement of Cash Flows
What is the basic accounting equation?
Assets = Liabilities + Equity
What are the two sides of every journal entry?
Debit and Credit
What does GAAP Stand for?
Generally Accepted Accounting Principles
Current assets / Current liabilities gives us what?
Current Ratio
Which statement shows a company's profitability?
Income Statement
If assets = $100,000 and liabilities = $40,000, what is equity
$60,000
Record the purchase of supplies for $1,000 on credit.
Dr. Supplies $1,000; Cr Accounts Payable $1,000
What is the assumption that a business will continue operating?
Going Concern Assumption
What does a debt-to-assets ratio measure?
Measures how much of a company's assets are financed by debt (financial leverage)
Which statement shows the accounting equation in action?
Balance Sheet
Equity is increase by ________ and decreased by ________.
Increased by revenues, investments by owners; decreased by expenses, dividends (or withdrawals)
Record adjusting entry for $500 salaries owed but unpaid
Dr Salaries Expense $500; Cr Salaries Payable $500
What qualitative Characteristic means numbers should reflect what really happened?
Faithful Representation
If sales = $100,000 and net income = $10,000, what is net profit margin?
10%
Where does Other Comprehensive Income appear?
Statement of Comprehensive Income or Statement of Stockholders' Equity
How does issuing stock differ from earning revenue in terms of equity?
Issuing stock increases equity via contributed capital, while earning revenue increases equity via retained earnings.
What kind of account is Allowance for Doubtful Accounts?
A contra-asset account (reduces Accounts Receivable)
Which body currently issues GAAP?
Financial Accounting Standards Board (FASB)
Why might two companies with the same net income have very different ROE?
Because ROE (Net income / Equity) depends on leverage, capital structure, and efficiency, not just profitability.
What is the difference between net income and comprehensive income?
Net Income = Revenues - Expenses
Comprehensive Income = Net income +/- other comprehensive income (unrealized gains/ losses on securities, foreign currency translation, adjustments, etc.)
AOCI is part of stockholders' equity (separate from retained earnings).
Which GAAP Principle requires recording bad debts as an estimate rather than waiting until they're uncollectible?
Matching Principles - Record expenses in the period incurred, not when cash is paid
What is the purpose of the FASB Conceptual Framework?
To provide a theoretical foundation for accounting standards - guiding recognition, measurement, presentation and disclosure rules
What's the difference between liquidity ratios and solvency ratios?
Liquidity Ratios = Short-term ability to pay debts (current ratio, quick ratio)
Solvency ratios = long-term financial health (e.g., debt-to-assets, times interest earned).