What is accounting?
The process of identifying, measuring, and communicating an entity’s financial information for informed user decisions.
What does accounting link decision makers with?
Economic activities and the results of their decisions.
What three areas does accounting provide information about?
Profitability, financial position, and cash flows.
What is an accounting conceptual framework?
A statement of principles guiding the development and evaluation of reporting practices.
Who receives external financial accounting reports?
People outside the day-to-day running of a business.
Who uses internal management accounting reports?
People managing a business on a day-to-day basis.
How are a business entity’s affairs separated from its owner’s personal affairs?
They are separate.
What liability do a corporation’s owners have?
Limited liability.
What does a balance sheet list at a specific date?
Assets, liabilities, and owners’ equity.
When does a balance sheet report financial position?
At a specific date, usually the end of a month or year.
What does an income statement summarize for a specific period?
Revenue and expenses.
What does a statement of cash flows depict?
How cash changed during a designated period.
What is an asset?
An economic resource controlled by an entity from past events, expected to provide future economic benefits.
What defines a liability?
A present obligation from past events whose settlement is expected to cause an outflow of economic resources.
How is owners’ equity calculated?
Total assets minus total liabilities.
What does owners’ equity represent for business owners?
Their claim against the business’s assets.
What is the accounting equation?
What two conditions must an item meet to be recognised as an asset?
Future economic benefits must be probable, and cost or value must be reliably measurable.
What distinguishes current assets from fixed assets?
Current assets are expected to become cash within the trading cycle; fixed assets are retained to provide business services rather than for resale.
When are current liabilities usually expected to be repaid?
Within one year or the business’s operating cycle.
When are long-term liabilities expected to be repaid?
After one year.
What does revenue represent during an accounting period?
The price of goods sold and services rendered.
How does revenue affect owners’ equity?
It increases owners’ equity.
What is an expense?
The cost of goods and services used up in earning revenue.
How does an expense affect owners’ equity?
It decreases owners’ equity.
How does net income affect owners’ equity through business profits?
It increases owners’ equity.
What is net income not classified as?
An asset.
Who uses accounting information?
Investors, creditors, managers, owners, customers, employees, and regulators.
What decisions and evaluations does accounting information support?
Performance evaluations, stock investments, tax strategies, resource allocations, lending, and borrowing decisions.
Which accounting principles are listed?
Going concern, accruals or matching, consistency, prudence, fair value, and a true and fair view.
What is fair value?
The amount for which an asset could be exchanged.
Which statements does external reporting disclose?
The income statement, statement of cash flows, and balance sheet.
Which standards system is associated with external reporting?
GAAP.
Which regulator is associated with external reporting?
The Securities and Exchange Commission.
How many owners does a sole trader have?
One owner.
What liability does a sole trader have?
Unlimited liability.
How many owners does a partnership have?
Several owners.
What liability do partners usually face?
Unlimited liability.
What is the difference between revenues and expenses?
Net income or net loss.
How does a balance sheet classify liabilities and owners’ equity?
As sources of funds.
How are assets ordered on a balance sheet?
By relative liquidity.
What does liquidity measure?
How quickly an item can be converted to cash.
What increased when Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service on May 1, N?
Cash and capital stock each increased by $8,000.
What was the effect on JJ’s total assets when it bought a $2,500 mower for cash on May 2?
Total assets did not change.
How did JJ’s finance the $15,000 truck purchased on May 8?
It paid $2,000 cash and issued a $13,000 note payable.
Which accounts increased when JJ’s bought $300 of repair parts on account on May 11?
Tools and equipment and accounts payable each increased by $300.
What did JJ’s record when it sold half its repair parts to ABC Lawns on May 18?
Accounts receivable increased and tools and equipment decreased by $150.
How did ABC Lawns’ $75 payment on May 25 affect JJ’s accounts?
Cash increased and accounts receivable decreased by $75.
How did JJ’s $150 payment on accounts payable affect its accounts on May 28?
Cash and accounts payable each decreased by $150.
What was JJ’s book value on May 28?
$8,000.
Which item examples does the course use to consider asset recognition?
Land and buildings, workforce, raw materials, and an advertising campaign.
What are the main categories of current assets?
Inventories, debtors, short-term investments, and cash at bank.
Which items can be classified as inventories within current assets?
Raw materials, work-in-progress, and finished goods.
What are the main categories of fixed assets?
Intangible assets, tangible assets, and long-term investments in other companies.
What happens when a company owns more than 50% of another company?
The subsidiary’s accounts are consolidated with the parent company’s accounts.
What is depreciation?
The allocation of an asset’s cost to expense over the periods in which its services are received.
Which creditors are examples of current liabilities?
Accounts payable and bank overdrafts.
What is a provision?
Funds set aside for a likely future event with uncertain timing or cost.
Which costs can a provision cover?
Division-closure costs or product-warranty repairs.
What are examples of long-term liabilities?
Long-term loans and provisions for likely future events with uncertain costs or timing.
What does owners’ equity comprise?
Original share capital and cumulative retained earnings.
How are a corporation’s retained earnings calculated?
Lifetime net income less dividends distributed to stockholders.
What net income did JJ’s lawn-care business earn in May?
$700.
Answer 20 questions on Financial Accounting Fundamentals.
1. Which statements describe the purpose of accounting?
2. An investor is reviewing a company’s reports before deciding whether to invest. Which information does accounting provide?
Go over the full study guide for Financial Accounting Fundamentals.
Read the study guide →Upload your class notes and Revizly writes your flashcards in about a minute.
Flashcard maker