Accounting Fundamentals Quiz

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Questions and Answers

What is the fundamental accounting equation?

  • Equity = Assets - Liabilities
  • Assets = Liabilities + Equity (correct)
  • Assets + Liabilities = Equity
  • Liabilities = Assets - Equity

The matching principle involves recognizing revenues before expenses are incurred.

False (B)

Name the two primary accounting standards used globally.

GAAP and IFRS

In accrual accounting, revenues are recorded when they are __________.

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

Match the following accounting concepts with their definitions:

<p>Going concern assumption = Assumes business will continue operating Materiality = Focus on significant amounts Consistency Principle = Applying accounting methods consistently Matching principle = Matching expenses with revenues</p> Signup and view all the answers

Which accounting method records transactions when cash is received or paid?

<p>Cash accounting (A)</p> Signup and view all the answers

An auditor is responsible for maintaining accurate financial records.

<p>False (B)</p> Signup and view all the answers

Which accounting principle assumes that an entity will continue operating indefinitely?

<p>Going concern principle (C)</p> Signup and view all the answers

Double-entry bookkeeping records each transaction in one account.

<p>False (B)</p> Signup and view all the answers

What does the GAAP stand for?

<p>Generally Accepted Accounting Principles</p> Signup and view all the answers

What three financial statements are primarily provided in financial accounting?

<p>Balance sheet, income statement, statement of cash flows</p> Signup and view all the answers

The principle that records revenues when earned and expenses when incurred is known as ___.

<p>accrual accounting</p> Signup and view all the answers

Match each financial statement with its primary focus:

<p>Balance Sheet = Snapshot of financial position Income Statement = Performance over time Statement of Cash Flows = Movement of cash Financial Accounting = External reporting</p> Signup and view all the answers

Which type of accounting is primarily concerned with internal information for management use?

<p>Management accounting (C)</p> Signup and view all the answers

Conservatism in accounting favors options that overstate potential economic benefits.

<p>False (B)</p> Signup and view all the answers

What does the accounting equation state?

<p>Assets = Liabilities + Equity</p> Signup and view all the answers

Flashcards

What is Accounting?

The process of recording, classifying, summarizing, and reporting financial transactions of a business. It provides vital information for decision-making by both internal managers and external stakeholders like investors.

Core Accounting Principles

Principles that ensure the reliability and accuracy of financial statements. They provide a common framework for accounting practices.

Matching Principle

A fundamental principle that matches revenue earned with the expenses incurred to generate that revenue. It ensures that income and expenses are properly paired for accurate reporting.

Going Concern Principle

A core accounting principle that assumes a business will continue operating in the foreseeable future. It influences how assets are valued and how liabilities are recorded.

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Double-Entry Bookkeeping

A system where every financial transaction affects at least two accounts. This ensures the basic accounting equation (Assets = Liabilities + Equity) remains balanced.

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Financial Accounting

Provides financial statements (balance sheet, income statement, and cash flow statement) to external users like investors and creditors. It follows GAAP or IFRS accounting rules.

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Management Accounting

Provides financial information for internal management to help with planning, controlling, and decision-making. It doesn't need to follow external reporting standards.

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Accrual Accounting

Records revenues when earned and expenses when incurred, regardless of when cash is received or paid. It gives a more accurate picture of financial performance than cash accounting.

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What is the Accounting Equation?

It shows the basic relationship between a company's assets, liabilities, and equity. Think of it as the foundation of accounting.

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What is the Matching Principle?

It's used to match revenue earned with the expenses incurred to generate that revenue. In this way, it determines net income or loss for a specific period.

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What is GAAP?

It's a standard set of accounting rules used in the United States. It ensures that financial reporting is consistent and comparable across companies.

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What is IFRS?

It's a set of accounting standards used globally by many companies. It aims to ensure consistency in financial reporting across the world.

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What is the Going Concern Assumption?

This assumption suggests that a company will continue to operate in the foreseeable future. It's essential for preparing financial statements because it implies that the company won't be liquidated.

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What is Cash Accounting?

It's a method of accounting that records transactions when cash is received or paid out.

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What is Accrual Accounting?

It's a method of accounting that records revenues when they are earned and expenses when they are incurred, regardless of when cash is received or paid.

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What is the role of an Auditor?

Auditors are independent professionals who verify the accuracy and reliability of financial records. They provide an unbiased opinion on the accuracy of financial statements.

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Study Notes

Fundamental Concepts

  • Accounting is a system for recording, classifying, summarizing, and reporting financial transactions of an entity. It's crucial for internal (e.g., management) and external (e.g., investors) decision-making.
  • Core accounting principles ensure financial statement reliability. These include the matching principle (linking revenues to expenses) and the going concern principle (assuming continued operations).
  • Double-entry bookkeeping ensures the accounting equation (Assets = Liabilities + Equity) remains balanced by affecting at least two accounts for every transaction.

Types of Accounting

  • Financial accounting: Provides financial statements (balance sheet, income statement, cash flow statement) to external users (investors, creditors). It adheres to GAAP or IFRS.
  • Management accounting: Provides internal information for planning, control, and decision-making. It doesn't follow external reporting standards.

Financial Statements

  • Balance Sheet: A snapshot of a company's financial position at a point in time. It shows assets, liabilities, and equity.
    • Assets are company resources (e.g., cash, equipment).
    • Liabilities are obligations to others (e.g., loans, accounts payable).
    • Equity represents owners' stake.
  • Income Statement: Reflects a company's financial performance over a period. It reports revenues and expenses, calculating net income (or loss).
  • Statement of Cash Flows: Details cash inflows and outflows over a period. It categorizes these flows as operating, investing, and financing activities.

Accounting Principles

  • Accrual accounting: Records revenues when earned and expenses when incurred, regardless of cash flow. Contrasts with cash accounting.
  • Conservatism: In uncertain situations, choose the option least boosting perceived company value. This preserves honest financial information presentation.

Key Accounting Equations

  • Assets = Liabilities + Equity: The fundamental accounting equation.
  • Revenues - Expenses = Net Income/Net Loss: The link between top-line (revenues) and bottom-line (net income).

Accounting Standards

  • GAAP (Generally Accepted Accounting Principles): A US standard for consistent and comparable financial reporting.
  • IFRS (International Financial Reporting Standards): A global framework for accounting standards, widely used internationally.

Important Accounting Concepts

  • Matching principle: Match expenses to related revenues within the same period to calculate net income.
  • Going concern assumption: Assumes ongoing operations for financial statement preparation. This avoids liquidating-company-specific reporting assumptions.
  • Materiality: Insignificant items are aggregated; detailed recording isn't needed when the benefit doesn't justify the cost.
  • Consistency principle: Use constant accounting methods for comparable reporting over time.

Accounting Methods

  • Cash accounting: Records transactions when cash is received or paid.
  • Accrual accounting: Records revenues when earned and expenses incurred, regardless of cash flow.
  • Budgeting: Projects future financial performance (revenues, expenses).
  • Cost accounting: Calculates manufacturing costs to aid pricing and efficiency.

Roles in Accounting

  • Accountant: Maintains financial records.
  • Auditor: Verifies financial record accuracy.

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