Comprehensive Study Set on Financial Accounting: Understanding Balance Sheets and Income Statements
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Comprehensive Study Set on Financial Accounting: Understanding Balance Sheets and Income Statements
20 flashcards
Q1:What are the three main components of a balance sheet?
A:Assets, Liabilities, and Equity.
Q2:What does the income statement report?
A:The income statement reports a company's revenues, expenses, and profits over a specific period.
Q3:What is the accounting equation?
A:Assets = Liabilities + Equity.
Q4:How do you calculate net income from an income statement?
A:Net income is calculated by subtracting total expenses from total revenues.
Q5:What is the purpose of the balance sheet?
A:The purpose of the balance sheet is to provide a snapshot of a company's financial position at a specific point in time.
Q6:What are current assets?
A:Current assets are assets that are expected to be converted into cash or used within one year, such as cash, inventory, and accounts receivable.
Q7:What is the difference between fixed assets and current assets?
A:Fixed assets are long-term assets that are not expected to be converted into cash within one year, such as buildings and equipment.
Q8:What is retained earnings?
A:Retained earnings are the cumulative amount of net income that a company has retained, rather than distributed as dividends.
Q9:What are operating expenses on an income statement?
A:Operating expenses are the costs required to run a business, excluding the cost of goods sold (COGS).
Q10:What does the term 'liquidity' refer to in the context of financial statements?
A:Liquidity refers to the ability of an organization to meet its short-term financial obligations.
Q11:What role does depreciation play in the income statement?
A:Depreciation is an expense that reduces the book value of fixed assets on the balance sheet and is accounted for as an expense on the income statement.
Q12:What is a 'current ratio'?
A:The current ratio is a liquidity ratio calculated by dividing current assets by current liabilities.
Q13:What is ‘earnings per share’ (EPS)?
A:EPS is calculated by dividing net income by the number of outstanding shares of common stock.
Q14:What are financial ratios used for?
A:Financial ratios are used to evaluate a company’s performance and financial health.
Q15:What is a common size income statement?
A:A common size income statement expresses each line item as a percentage of total revenue.
Q16:Define 'working capital'.
A:Working capital is the difference between current assets and current liabilities, indicating the short-term financial health of a business.
Q17:What is 'gross profit'?
A:Gross profit is calculated by subtracting the cost of goods sold (COGS) from total revenue.
Q18:Explain the term 'accrual accounting'.
A:Accrual accounting recognizes revenues and expenses when they are incurred, regardless of when cash is exchanged.
Q19:What does 'accounting policies' refer to?
A:Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
Q20:What is the difference between the income statement and cash flow statement?
A:The income statement focuses on profitability over a period while the cash flow statement provides information about cash receipts and cash payments.
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What are the three main components of a balance sheet?
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