Accounting Fundamentals and Principles

Accounting Fundamentals

• Two main qualities of accounting: relevance and reliability.
• Largest organization of professional accountants: AICPA.
• FASB's key role: establishing GAAP (Generally Accepted Accounting Principles).

Stockholders Equity

• Defined as owners' interest in the assets of a corporation.
• Increases through owner investments and net income.

Accounting Process

• Double entry accounting requires at least two accounts per transaction.
• Cash received for stock issuance results in increased assets and equity.
• Performing services on account increases assets and revenues.
• Accounting transactions are first recorded in journals or databases.

Bookkeeping Principles

• Posting process involves transferring data from journals to ledgers.
• Primary methods for accounting transactions: cash basis and accrual basis.

Accrual Accounting

• Accrual events record expenses or revenues before cash settlement.
• Adjusting entry for expired insurance credits prepaid insurance.

Internal Control and Management

• Not a purpose of internal controls: promoting operational inefficiency.
• Top management holds primary responsibility for ensuring internal controls.

Bank Reconciliation

• Deposits in transit should be added to the bank balance during reconciliation.

Merchandising and Profit Analysis

• In merchandising, gross profit equals sales revenue minus cost of goods sold.
• Perpetual inventory system maintains a continuous inventory record.

Accounts Receivable and Contingent Loss

• Under allowance method, recording bad debt expense reduces net income.
• Contingent losses with a reasonable chance of occurrence must be reported in financial statement notes.

Investments and Securities

• Effective rate of interest: the returns investors expect for loaning money.
• Bonds issued below market interest rate result in a discount.
• Investments not classified as trading or held to maturity are available for sale securities.

Asset Valuation and Capital Structure

• Accounting book value of an asset: cost minus accumulated depreciation.
• Paid-in capital is also known as additional contributed capital.
• Without treasury stock and other comprehensive income, stockholders' equity consists of contributed capital and retained earnings.

Equity Analysis

• Total stockholders' equity is reduced by treasury stock.
• Return on equity measures profitability in relation to net income against average common stockholders' equity.
• Return on assets assesses management efficiency in utilizing assets to generate income.

Cash Flow Reporting

• Cash transactions for long-term assets categorized as investing activities.
• Changes in current assets or liabilities reported as operating activities.

Financial Reporting and Compliance

• Statement of responsibility asserts management's accountability for financial statements in line with GAAP.
• SEC mandates audits for companies issuing publicly traded stock.

Test your knowledge on the basics of accounting, including key qualities such as relevance and reliability, the role of FASB in establishing GAAP, and the importance of stockholders' equity. This quiz also covers the accounting process, bookkeeping principles, and accrual accounting methods.