Accounting Basics Financial Statements Syllabus

Financial Statements syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Financial Statements in Accounting Basics, not a summary of it.

1. 1

   The Income Statement

   3 topics

   • Revenues and Expenses
   • Single-Step vs. Multi-Step Formats
   • Net Income and Net Loss
2. 2

   The Statement of Owner's Equity

   2 topics

   • Investments and Drawings
   • Effect of Net Income on Equity
3. 3

   The Balance Sheet

   3 topics

   • Classified Balance Sheet
   • Report Form vs. Account Form
   • Liquidity Order of Accounts
4. 4

   The Statement of Cash Flows

   3 topics

   • Operating, Investing, and Financing Activities
   • Direct vs. Indirect Method
   • Cash vs. Net Income
5. 5

   Notes and Interrelationships

   2 topics

   • Notes to the Financial Statements
   • How the Statements Connect

Financial Statements flashcards for Accounting Basics

25 of 50 cards from the Financial Statements deck — real questions with worked answers.

1. What is revenue in accounting?

   Revenue is the gross inflow of economic benefits (assets received or liabilities settled) from delivering goods or services in the entity's ordinary business activities. It increases owner's equity.

2. What is an expense in accounting?

   An expense is the cost of assets consumed or services used in the process of earning revenue during a period. Expenses decrease owner's equity.

3. On which financial statement do revenues and expenses appear, and what does that statement report?

   They appear on the income statement, which reports a company's revenues and expenses for a specific period of time (e.g., a month, quarter, or year).

4. State the basic formula for net income on the income statement.

   $$\text{Net Income} = \text{Total Revenues} - \text{Total Expenses}$$

5. When does a company report a net loss instead of net income?

   A net loss occurs when total expenses exceed total revenues for the period, i.e., when $\text{Total Expenses} > \text{Total Revenues}$.

6. How does a single-step income statement calculate net income?

   It uses one step: total all revenues, total all expenses, then subtract total expenses from total revenues in a single subtraction to arrive at net income. No subtotals are computed.

7. What are the two main groupings on a single-step income statement?

   Revenues (all revenues and gains) and Expenses (all expenses and losses), each combined into a single total.

8. How does a multi-step income statement differ from a single-step statement?

   A multi-step statement reports several intermediate subtotals (such as gross profit and income from operations) and separates operating from non-operating items, rather than doing one single subtraction.

9. What is the formula for gross profit on a multi-step income statement?

   $$\text{Gross Profit} = \text{Net Sales} - \text{Cost of Goods Sold}$$

10. How is income from operations calculated on a multi-step income statement?

    $$\text{Income from Operations} = \text{Gross Profit} - \text{Operating Expenses}$$

11. What distinguishes operating from non-operating items on a multi-step income statement?

    Operating items arise from the company's main business activities; non-operating items (other revenues/gains and other expenses/losses, such as interest revenue or interest expense) are unrelated to primary operations and are reported separately.

12. Which income statement format is generally more useful to decision-makers, and why?

    The multi-step format, because its subtotals (gross profit, income from operations) reveal more detail about profitability from core operations versus other activities.

13. What is an investment (contribution) by the owner, and how does it affect equity?

    An owner's investment is cash or other assets the owner puts into the business. It increases owner's equity (specifically owner's capital).

14. What are drawings (withdrawals), and how do they affect equity?

    Drawings are withdrawals of cash or other assets by the owner for personal use. They decrease owner's equity.

15. Are owner's drawings an expense of the business? Explain.

    No. Drawings are not an expense; they are a reduction of owner's equity for personal use and do not appear on the income statement or affect net income.

16. State the expanded formula for ending owner's equity (capital).

    $$\text{Ending Capital} = \text{Beginning Capital} + \text{Investments} + \text{Net Income} - \text{Drawings}$$

17. How does net income affect owner's equity?

    Net income increases owner's equity, because revenues (which increase equity) exceed expenses (which decrease equity).

18. How does a net loss affect owner's equity?

    A net loss decreases owner's equity, because expenses exceed revenues for the period.

19. Which financial statement links the income statement to the balance sheet, and how?

    The statement of owner's equity (or retained earnings): it takes net income from the income statement and produces the ending equity/capital balance that appears on the balance sheet.

20. What is a classified balance sheet?

    A balance sheet that groups assets and liabilities into subcategories (such as current and long-term) to give readers more meaningful, organized information about financial position.

21. What are current assets?

    Assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer (e.g., cash, accounts receivable, inventory, prepaid expenses).

22. How are current assets typically ordered on a classified balance sheet?

    In order of liquidity — how quickly they can be converted to cash — starting with cash, then short-term investments, receivables, inventory, and prepaid expenses.

23. What are long-term (non-current) assets? Give an example category.

    Assets not expected to be converted to cash or consumed within one year, such as long-term investments, property/plant/equipment (PP&E), and intangible assets.

24. What are current liabilities?

    Obligations the company expects to pay within one year or its operating cycle, such as accounts payable, salaries payable, unearned revenue, and the current portion of long-term debt.

25. What is working capital and how is it calculated?

    Working capital measures short-term liquidity: $$\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$$

See more Financial Statements flashcards →

Planning Financial Statements for Accounting Basics

Financial Statements (Accounting Basics) FAQ