Question

Definitional problems: Listed are eight terms that relate to financial statements: L Balance-sheet statement 2. Income statement 3. Cash-flow statement 13.1 5. Investment activities Financing activities 7. Treasury account . Capital account Choose the term from the list that most appropriately completes each of the As an outside investor, you would view a firm's important financial report for gauging the quality of earnings Retained earnings as reported in the by the firm in past years that has not been paid out as dividends The its cash position by providing actual net cash flows into or out of the firm during some specified period. Typically, a firm's cash flow statement is categorized into three activities: represent income earned is designed to show how a firm's operations have affected and When you issue stock, the money raised beyond the par value is shown in the In the

Answer 1

1) As an Outside investor, You would view a firm's Income statement and Cash-Flow Statement as the most important financial reports for gauging the quality of earnings.

• The relationship between net income and operating cash flow, is an indicator of earnings quality. If a company has large Net Income but poor operating cash flow, it may be a sign of poor earnings quality.

2) Retained Earnings as reported in the Balance sheet represent income earned by the firm in the past years that has not been paid out as dividends.

3) The Cash-Flow Statement is designed to show how a firm's operations have affected its cash position by providing actual net cash flows into or out of the firm during some specified period.

4) Typically Firm's activities are categorized into three activities:

• Cash Flow from Operations
• Cash Flow from Investing Activities,
• Cash Flow from Financing Activities

5) When you issue stock, the money raised beyond the par value is shown in the Capital Account in the Balance-sheet statement

In a corporation the capital accounts include:

• Paid-in capital accounts such as Common Stock, Preferred Stock, Paid-in Capital in Excess of Par. These accounts report the amounts received by the corporation when the shares of its capital stock were originally issued to investors.
• Retained earnings accounts which typically contain the amount of the corporation's cumulative earnings since the corporation was formed minus the cumulative dividends distributed to the stockholders.
• Treasury stock account (a contra account because it has a debit balance) usually reporting the amount paid by the corporation to repurchase its own shares of stock that have not been retired.