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INTERMEDIATE ACCOUNTING 1: EXAM CHAPTER 1&2 QUESTIONS AND ANSWERS
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INTERMEDIATE ACCOUNTING 1: EXAM CHAPTER 1&2 QUESTIONS AND ANSWERS
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INTERMEDIATE ACCOUNTING 1: EXAMCHAPTER 1&2 QUESTIONS AND
ANSWERS
Describe the function and primary focus of financial accounting - answer-primary
objective:
To provide investors and creditors with useful information for decision making
-provides information to predict the future risk and potential return of their prospective
investments or loans
-"special" language used to communicate financial information to help people inside and
outside of the business to make decisions
-provides useful information about economic activity to help produce more good
decisions and foster a prosperous society
-by providing key information to capital market participants, it also plays a vital role that
helps society's resources to the companies that will utlize those resources most
effectively
What is the primary focus of financial accounting? - answer-chiefly concerned with
providing financial information to various external users
*primary focus*
On the information needs of investors and creditors
External user groups:
Financial intermediaries, financial analysts, stock brokers, mutual fund managers, and
credit rating organizations
Financial statements most frequently provided - answer-1. Balance sheet (statement of
financial position)
2. The income statement (statement of operations)
3. The statement of cash flows
4. The statement of shareholder's equity
Financial reporting - answer-refers to the process of providing this information to
external users
(financial statements, how they are measured, concepts underlying measurements and
related disclosures )
Capital markets - answer-markets that provide a mechanism to help our economy
allocate resources efficiently
,Composite of all investors and creditors
Businesses come here to get cash necessary for them to function
Corporations acquire ___ from —- in exchange for ownership ___ and from _____ by
borrowing - answer-corporations acquire capital from investors in exchange for
ownership and from creditors by borrowing
Three primary forms of business organizations - answer-sole proprietorship
The partnership
The corporation
- in the us sole proprietorships and partnerships outnumber corporations
Dominant form of business organization in terms of ownership of productive resources
is the corporation
Investors vs. Creditors - answer-investors provide resources, usually cash, to a
corporation in exchange for an ownership interest, that is shares of stock
Creditors lend cash to the corporation, either by making individual loans or by
purchasing publicly traded debt such as bonds
How are the decisions of investors and credits similar? - answer-investors and creditors
are only willing to provide capital to a corporation (buy stocks or bonds) only if they
expect to receive more cash in return at some time in the future
-corp. Shareholders receive cash from investment through ultimate sale of the
ownership shares of stock
-many corporations distribute cash in the form of periodic dividends
If the investor provides a company with $10,000 cash by purchasing stock at the end of
2020, receives $400 in dividends from the company during 2021, and sells the
ownership interest (shares) at the end of 2021 for $10,600, what is the rate of return? -
answer-$400 dividends + $600 share price appreciation
_________________________________________
$10,000 initial investment
=10%
What are key variables in the investment decision? - answer-the expected rate of return
and the uncertainty, or risk, of that return are key variables in the investment decision.
=if potential return is high enough, investors will prefer to invest in a profit-oriented
company even if it has more risk associated with it
, A company will be able to provide a positive return to investors and creditors only if it
can generate ______ - answer-a profit from selling its product or services
What does financial accounting help investors and creditors evaluate? - answer-the
amounts, timing, and uncertainty of the enterprise's future cash receipts and
disbursements
The better the information the more efficient investor and creditor allocation decisions
Lo 1-2
Explain the difference between cash and accrual accounting - answer-predicting cash
flows is the primary goals for most users of financial reporting
Model best able to achieve this goal is accrual accounting
Accrual accounting
-measures income according to the entity's accomplishments and resource sacrifices
during the period from transactions related to providing goods and services to
customers, regardless of when cash is received or paid.
Cash-basic accounting
-measures income as the difference between cash receipts and cash disbursements
during a reporting period from transactions related to providing goods and services to
customers
Both:produces a periodic measure of performance that could be used by investors and
creditors for predicting future cash flows
Cash-basis accounting - answer--produces a measure called net operating cash flow
What is net operating cash flow?
-the difference between cash receipts and cash disbursements from providing goods
and services to customers during a reporting period
-over the life of the company it is definately a measure of concern, but over short
periods of time, it (operating cash flow) may not be indicative of the company's long run
cash generating ability nor an accurate predictor of future operating cash flows
-sometimes a company receives cash in one period that relates to performance in
multiple periods
Study illustration 1-3 p. 7
-statement of cash flows- reports information about cash flows from operating, investing
and financing activities and provides important info to creditors/investors
Accrual accounting model - answer--by measuring activities with this model, we get a
more accurate prediction of future operating cash flows and a more reasonable
portrayal of the company
-doesnt only focus on cash flows
-reflects other resources provided and consumed by operations during a period
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