Accounting Fundamentals Lesson 1

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Questions and Answers

Which of the following categories includes obligations expected to be satisfied within one year?

Assets

Owners' equity

Noncurrent liabilities

Current liabilities (correct)

Which of the following is NOT included in the current liabilities?

Notes payable

Bonds payable (correct)

Accrued expenses

Accounts payable

What basic formula represents the calculation of net income?

Revenues x Expenses

Revenues + Expenses

Revenues / Expenses

Revenues - Expenses (correct)

Which financial indicator measures a company's ability to meet long-term obligations?

Debt-equity ratio Signup and view all the answers

When a company records a $100 sale, which of the following accounts is credited?

Owners Equity (Sales) Signup and view all the answers

Which section of a corporation's balance sheet includes retained earnings?

Owners' equity Signup and view all the answers

What does the income statement primarily indicate about a business?

The company’s earnings and profitability Signup and view all the answers

Which of the following would decrease both assets and owners' equity?

Recording an expense Signup and view all the answers

Which financial statement provides information about a company's financial position at a specific point in time?

Balance sheet Signup and view all the answers

What does the accounting equation represent?

Assets = Liabilities + Owners Equity Signup and view all the answers

Which of the following is classified as a current asset?

Accounts receivables Signup and view all the answers

What is the primary purpose of the balance sheet?

To indicate the company’s liquidity and financial position Signup and view all the answers

What type of assets are listed first on a balance sheet?

Current assets Signup and view all the answers

Which of the following is NOT included in the balance sheet?

Total revenues Signup and view all the answers

Which category of assets includes cash and cash equivalents?

Current assets Signup and view all the answers

Which statement correctly describes liabilities?

Liabilities are obligations that will be settled using assets. Signup and view all the answers

What is the primary purpose of tax accounting in a corporation?

To minimize tax payments and support financial reporting Signup and view all the answers

What distinct purpose does fund accounting serve for nonprofit entities?

To manage and allocate resources for achieving specific objectives Signup and view all the answers

Which activity is NOT typically associated with forensic accounting?

Tax preparation and filing Signup and view all the answers

In fund accounting, what is the function of a general fund?

To cover day-to-day operational expenses Signup and view all the answers

What role do forensic accountants play in relation to legal investigations?

They analyze financial evidence and quantify damages Signup and view all the answers

What formula represents how to calculate Ending Equity for a sole-proprietorship?

Ending Equity = Beginning Equity + Investments - Withdrawals + Income Signup and view all the answers

Which of the following items is NOT included in the Stockholders’ Equity of a corporation?

Long-Term Debt Signup and view all the answers

Which category does cash flow from selling common stock fall under in the statement of cash flows?

Financing Activities Signup and view all the answers

What type of account is 'Accounts Payable' classified as?

Liability Signup and view all the answers

In a cash flow statement, which component indicates the cash position at the beginning of the period?

Cash and equivalents at start of period Signup and view all the answers

In double-entry bookkeeping, what is the effect of debiting an asset account?

Increases the asset Signup and view all the answers

Which of the following accounts would be recorded as a debit when purchasing office furniture?

Office Furniture Signup and view all the answers

What is the primary purpose of the statement of cash flows?

To record only actual cash transactions Signup and view all the answers

What must be true for every accounting transaction under double-entry bookkeeping?

At least two accounts are affected. Signup and view all the answers

Which of the following best describes the purpose of the investing activities section in the statement of cash flows?

It captures cash used for purchasing and selling long-term assets Signup and view all the answers

Which statement regarding the statement of cash flows is true?

It provides insights for both financing and investing activities. Signup and view all the answers

What type of account is represented by 'Merchandise Inventory'?

Asset Signup and view all the answers

What is included at the end of the cash flow statement to provide a summary of cash position?

Net increase (decrease) in cash Signup and view all the answers

When cash is decreased in accounting transactions, which action is taken?

Cash account is credited. Signup and view all the answers

Which of the following describes what a credit does in the context of accounting?

Increases revenue or reduces assets Signup and view all the answers

What accounts for the misconception that 'debits' are always negative?

Debits are left-hand side entries in accounting. Signup and view all the answers

Study Notes

Financial Statements

Four main financial statements are commonly prepared by publicly traded companies:
- Balance Sheet
- Income Statement
- Statement of Cash Flows
- Statement of Retained Earnings (Owner's Equity)

Balance Sheet (Statement of Financial Position)

Provides insight into a company's ability to pay bills, acquire capital, and distribute cash dividends.
Includes three key items: the company name, statement title, and the specific date of the report.
Displays assets, liabilities, and shareholders' equity, adhering to the accounting equation:
- Assets = Liabilities + Owners Equity (A = L + OE)
Assets are categorized as current (expected within a year) and non-current (long-term).
Current assets include cash, short-term investments, accounts receivable, inventory, and prepaid expenses.
Non-current assets typically encompass long-term investments and intangible assets.
Liabilities are also divided into current (satisfied within a year) and non-current categories.
Key indicators derived from the balance sheet include working capital, current ratio, quick ratio, and debt-equity ratio.

Income Statement

Measures a company's earnings and profitability over a specific period (month, quarter, or year).
Formula for net income: Net Income = Revenues - Expenses.
Revenue increases assets and owners' equity, while expenses decrease them.
Depicts the relationship of debits and credits, which are essential for determining net income or loss.
Equity computation for sole proprietorships and corporations differs, with corporations including items like retained earnings and premium stock.

Statement of Cash Flows

Illustrates sources and uses of cash throughout a specified period.
Categorizes cash flow into operating activities, investing activities, and financing activities.
Includes sections for net cash flow from various activities, exchange rate impacts, and end-of-period cash balance.
Constructed using data from beginning and ending balance sheets, as well as income statements.

Key Accounting Terms

Accounts Payable: Liability
Accounts Receivable: Asset
Common Stock: Owners' Equity
Long-Term Debt: Liability
Retained Earnings: Owners' Equity
Accrued Expenses Payable: Liability

Double-Entry Bookkeeping

Records economic events as transactions affecting at least two accounts, involving at least one debit and one credit.
Each transaction includes the date, amount, and description.
Understanding debits and credits is crucial:
- Debit means left-hand side; Credit means right-hand side.
- Cash increases with debits and decreases with credits, reflecting the nuanced use of these terms.

Tax Accounting

Governed by laws and regulations at federal, state, and local levels.
Tax accountants aid in minimizing tax obligations and ensuring compliance with IRS rules.

Fund Accounting

Used in nonprofit entities to manage resources towards specific objectives.
Distinguishes between general funds for daily operations and special purpose funds for specific initiatives, helping maintain resource control.

Forensic Accounting

Involves accounting practices in legal contexts, such as litigation support and financial investigations.
Forensic accountants analyze financial evidence and may provide expert testimony in court-related matters.

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Description

This quiz covers the foundational concepts of financial statements, specifically focusing on the balance sheet, income statement, statement of cash flows, and statement of retained earnings. Understand how these financial documents reflect a company's operations and financial position. Test your knowledge on the purposes and structures of these essential accounting reports.