The Four Primary Financial Statements

Review Questions
Chapter 1 Review Questions: 12,13,15
12. what are the four primary financial statements? What basic information is shown on each?
There are four main financial statements. They are:
a)cash flow statements
b)income statements
c)statements of shareholders’ equity, and
d)balance sheets.
Cash flow statements depict the movement of money between a business and the outside world over time. Income statements illustrate how much money a firm earned and spent during a certain time period. Statement of shareholders’ equity depicts changes in the company's shareholders' interests over time. Finally, at a given point in time, balance sheets reflect what a company has and what it owes.
13. What does it mean to say that the income statement, statement of stockholders’ equity, and statement of cash flows measure activity over an interval of time, but the balance sheet measures activity at a point in time?
Account balances presented in the income statement, statement of shareholders' equity, and statement of cash flows represent activities from the beginning to the conclusion of the period. The balances of accounts presented in the balance sheet indicate the company's financial status as of a single date, the end of the period.
15. what is the accounting equation? Which financial statement reports the accounting equation?
The accounting equation is given by:
Assets = Liabilities + Stockholders’ Equity.
The account equation is reported in the balance sheet
Chapter2 RQ: 1,6,11
1.Explain the difference between external transactions and internal transactions. If a company purchases supplies from a local vendor, would this be classified as an external or internal transaction?
External transactions are those that the business performs with a different economic entity, while internal transactions are those that do not involve an exchange with a separate organization or person. When a company buys materials from a local vendor, the transaction is categorized as an external transaction.
6. what is the normal balance (credit or debit) of assets, liabilities, stockholders’ equity, revenues, and expenses?
Assets – Because assets are on the left side (debit side) of the accounting equation, they have normal debit balances.
Stockholders’ equity – Because they are on the right side (credit side) of the accounting equation, stockholders’ equity accounts (common stock and retained profits) have normal credit balances.
Revenues – Because sales enhance retained profits, which is on the credit side of the accounting equation, they have normal credit balances.
Expenses - Expenses have typical debit balances because they reduce retained profits, which is on the accounting equation's credit side.
11. what is a journal? What is a journal entry?
A journal is the official book of the firm in which all transactions are documented in chronological order.
A journal entry is a record of a company's business activities kept in its accounting records. A well-documented journal entry includes the right date, the amounts to be debited and credited, a description of the transaction, and a unique reference number.
Chapter3 RQ: 9, 20,23
9. why are adjusting entries necessary under accrual-basis accounting?
At the conclusion of each accounting period, companies make adjusting entries. These entries guarantee that revenues are recorded in the period in which they are generated and costs are recognized in the period in which they are incurred.
20. what is the purpose of adjusted trial balance? How do the adjusted trial balance and the (unadjusted) trial balance differ?
The adjusted trial balance's objective is to demonstrate the equality of debits and credits after adjustments have been made to the accounts at the conclusion of the period. The only difference between the two accounts is in the chronology of things. Unadjusted trial balances are created prior to adjustments and contain unadjusted balances of temporary accounts such as revenues and costs, while adjusted trial balances are generated after adjustments.
23. what are the two purposes of preparing closing entries.
* To bring the temporary account balances to zero. This gets them ready for the following accounting period. If temporary accounts are not terminated, the following period's revenues, costs, and income will include the prior period's and therefore be erroneous.
* To transfer temporary account balances to the retained earnings account. This is done to get the account ready for the Balance Sheet. Failure to do so would result in an understatement of shareholders' equity and a 'unbalanced' Balance Sheet.
Chapter4 RQ: 2,5,21
2.What is internal control? Why should a company establish an internal control system?
Internal control is a company's strategy for safeguarding assets and improving the accuracy and dependability of accounting data.
Effective internal control creates a barrier to prevent employee misappropriation of corporate cash and fraudulent or erroneous financial reporting. Investors might place a higher faith on reported financial accounts due to strong internal control mechanisms.
5. what is meant by the fraud triangle, and what can companies do to help prevent fraud?
The fraud triangle is a paradigm often used in auditing to describe why someone decides to commit fraud. The fraud triangle identifies three factors that contribute to the probability of fraud: (a) opportunity, (b) incentive, and (c) rationalization
A solid system of internal controls is usually considered as the most effective strategy to prevent fraud. A good control environment, a solid accounting system, and excellent control processes, as well as effective communication and monitoring, are all examples of internal controls.
21. what is a bank reconciliation? How can it help in determining whether proper control of cash has been maintained?
A bank reconciliation meshes perfectly timing differences and errors to match the balance of cash in the bank account with the balance of cash in the company's own records. The risk of mistakes, or even blatant fraud, makes the bank reconciliation a crucial cash management instrument.
Chapter5 RQ: 7,13,25
7. What two purposes do firms achieve by establishing future uncollectible accounts?
The two purposes include reducing accounts receivable to the amount expected to be collected and matching bad debts in the same period as the revenue (credit sales) they help to generate.
13. If at the end of the year allowance for uncollectible accounts has a credit balance before any adjusting entries, what might that tell us about last year’s ending balance of the account?
When actual bad debts in the current year are smaller than the prior year's estimate of bad debts, a credit balance arises in the Allowance for Uncollectible Accounts before adjustment.
25. explain why the percentage of receivables method is referred to as the balance sheet method and the percentage-of-credit-sales method is referred to as the income statement method.
In practice, the percentage of receivables method is widely employed. Accounts receivable must be declared at their net realizable value under financial accounting rules, which is best performed using the percentage of receivables method. The percentage of credit sales method is concerned with matching current period bad debt expense with current period credit sales, which is known as the matc...