Accounting Fundamentals and Principles
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Questions and Answers

What are the two main qualities of accounting?

  • Timeliness and transparency
  • Relevance and reliability (correct)
  • Accuracy and completeness
  • Consistency and comparability
  • What is the largest organization of professional accountants?

    AICPA

    What is the FASB responsible for establishing?

    GAAP

    What represents the owners' interest in the assets of a corporation?

    <p>Stockholders equity</p> Signup and view all the answers

    How does stockholders equity increase?

    <p>Both A and C</p> Signup and view all the answers

    What does double entry accounting indicate?

    <p>Uses at least two accounts to record a transaction.</p> Signup and view all the answers

    What happens when a company receives cash for issuing stock?

    <p>Increases assets and increases equity</p> Signup and view all the answers

    What occurs when a company performs services on account?

    <p>Increases assets and increases revenues</p> Signup and view all the answers

    What is not a component of stockholders equity?

    <p>Accounts Payable</p> Signup and view all the answers

    Where are accounting transactions originally recorded?

    <p>Journal or database</p> Signup and view all the answers

    What is the process of posting in traditional bookkeeping?

    <p>Transferring data from the journal to the ledger</p> Signup and view all the answers

    What are the two primary methods used to account for transactions?

    <p>Cash basis and accrual basis</p> Signup and view all the answers

    What does an accrual refer to?

    <p>An expense or revenue recorded before cash settlement.</p> Signup and view all the answers

    Which account is credited in the adjusting entry to record insurance expired during the current period?

    <p>Prepaid insurance</p> Signup and view all the answers

    What is not a purpose of internal control?

    <p>To promote operational inefficiency</p> Signup and view all the answers

    Who has the primary responsibility for ensuring internal control?

    <p>The company's top management</p> Signup and view all the answers

    What should be added to a bank balance in the bank reconciliation?

    <p>Deposits in transit</p> Signup and view all the answers

    In a merchandising business, gross profit is equal to sales revenue minus?

    <p>Cost of goods sold</p> Signup and view all the answers

    What does the perpetual inventory system provide?

    <p>A continuous record of inventory on hand</p> Signup and view all the answers

    Under the allowance method for estimating uncollectible accounts, what does the entry to record bad debt expense show?

    <p>A reduction in net income</p> Signup and view all the answers

    When a company has a contingent loss with a reasonably possible chance of occurrence, what does the FASB require?

    <p>It should be reported in the notes of the financial statement</p> Signup and view all the answers

    What is the interest rate that investors demand for loaning their money called?

    <p>Effective rate of interest</p> Signup and view all the answers

    If a bond is issued at a smaller percentage than the market rate, it is called a?

    <p>Discount</p> Signup and view all the answers

    What are all investments not classified as trading securities or held to maturity securities classified as?

    <p>Available for sale securities</p> Signup and view all the answers

    How is the accounting book value of an asset defined?

    <p>Cost minus accumulated depreciation</p> Signup and view all the answers

    Paid in capital is also known as?

    <p>Additional contributed capital</p> Signup and view all the answers

    Not counting treasury stock and other comprehensive income, stockholders equity is divided into?

    <p>Contributed capital and retained earnings</p> Signup and view all the answers

    What reduces total stockholders equity?

    <p>Treasury stock</p> Signup and view all the answers

    What assesses a company's profitability focusing on the relationship between net income and average common stockholders' equity?

    <p>Return on equity</p> Signup and view all the answers

    An investor who wishes to know whether a company is successful in using its assets to earn income for individuals who finance the business should review the?

    <p>Return on assets</p> Signup and view all the answers

    Cash paid or received for long-term assets should be reported as?

    <p>Investing activities</p> Signup and view all the answers

    Changes in current assets or current liabilities should be reported as?

    <p>Operating activities</p> Signup and view all the answers

    What does a statement of responsibility declare?

    <p>Top management is responsible for the financial statements prepared in accordance with GAAP</p> Signup and view all the answers

    Which entity requires companies issuing publicly traded stock to have their financial statements audited?

    <p>SEC</p> Signup and view all the answers

    Study Notes

    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.

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    Description

    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.

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