D103 Intermediate Accounting I - Set 5 - Part 2

Correct Answer: To prepare financial statements

Auditors review financial statements to ensure they are accurate and comply with accounting standards and regulations.

Correct Answer: Realization principle

The cost principle states that transactions should be recorded at their actual cost at the time of the transaction.

Correct Answer: The total assets of a company

Capital stock represents the total shares issued by a corporation, signifying ownership by shareholders.

Correct Answer: Asset

Accounts payable represents amounts owed by the company to suppliers or creditors for goods and services received.

Correct Answer: To prepare financial statements

Financial ratios provide insights into various aspects of a company's financial health, allowing for comparisons over time or with other companies.

Correct Answer: Unlimited liability

A sole proprietorship is not a separate legal entity; the owner is personally liable for the business's debts.

Correct Answer: The total income generated in a specific period

Retained earnings represent the portion of net income that is retained in the company rather than distributed to shareholders as dividends.

Correct Answer: Income statement

The cash flow statement provides a detailed account of all cash transactions within a company over a specified period.

Correct Answer: Revenue that has been earned but not yet received

Deferred revenue represents payments received before services are delivered or goods are provided, creating a liability until earned.

Correct Answer: Increases total equity

A stock dividend redistributes equity without affecting the overall total; it simply increases the number of shares while reducing retained earnings.

Correct Answer: Current ratio

Return on assets (ROA) measures how efficiently a company utilizes its assets to generate profit.

Correct Answer: To summarize cash inflows and outflows

The statement of changes in equity details the movement in equity components, including capital contributions, dividends, and retained earnings over a specific period.

Correct Answer: Revenue

Permanent accounts, such as assets, liabilities, and equity, carry their balances into the next accounting period, while temporary accounts are closed at period end.

Correct Answer: The ability to convert short-term assets into cash

Financial flexibility is essential for responding to changes in market conditions, enabling a company to manage its finances proactively.

Correct Answer: To track cash received from customers

Investing activities include transactions related to the purchase and sale of physical and financial assets, affecting long-term investment decisions.

Correct Answer: Cash basis accounting

Accrual basis accounting recognizes expenses in the period they are incurred, regardless of when cash is paid.

Correct Answer: The total debt of a company

Market capitalization is calculated by multiplying the current share price by the total number of outstanding shares, reflecting the company's market value.

Correct Answer: Selling equipment

Operating activities include transactions related to the core business operations, such as paying employees and collecting revenue.

Correct Answer: Total revenue minus total expenses

Net income represents the profit of a company after all expenses have been deducted from total revenue, reflecting overall financial performance.

Correct Answer: The company will liquidate its assets soon

The going concern principle assumes that a business will continue its operations indefinitely, which affects how assets and liabilities are valued.