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Questions and Answers
What is the primary purpose of an income statement?
What is the primary purpose of an income statement?
Which of the following is not a characteristic of an asset?
Which of the following is not a characteristic of an asset?
Which transaction type would be considered an external transaction?
Which transaction type would be considered an external transaction?
What effect do dividends have on retained earnings?
What effect do dividends have on retained earnings?
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How is net income determined in an income statement?
How is net income determined in an income statement?
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What must each accounting transaction satisfy in terms of the accounting equation?
What must each accounting transaction satisfy in terms of the accounting equation?
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Which component is not considered part of equity?
Which component is not considered part of equity?
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What type of accounting information system is influenced by the size of the company?
What type of accounting information system is influenced by the size of the company?
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What does the Statement of Cash Flows primarily summarize?
What does the Statement of Cash Flows primarily summarize?
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Which of the following is considered the most important indicator in the Statement of Cash Flows?
Which of the following is considered the most important indicator in the Statement of Cash Flows?
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When interpreting the cash flow statement, what does a net increase in cash during the period indicate?
When interpreting the cash flow statement, what does a net increase in cash during the period indicate?
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What key question does the Statement of Cash Flows address?
What key question does the Statement of Cash Flows address?
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Which of the following components is NOT part of the Statement of Cash Flows?
Which of the following components is NOT part of the Statement of Cash Flows?
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What is the purpose of reporting cash inflows and outflows in the Statement of Cash Flows?
What is the purpose of reporting cash inflows and outflows in the Statement of Cash Flows?
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In the Statement of Cash Flows, which activity would be categorized under cash flows from investing activities?
In the Statement of Cash Flows, which activity would be categorized under cash flows from investing activities?
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Which of the following best describes the impact of paying dividends on retained earnings?
Which of the following best describes the impact of paying dividends on retained earnings?
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What does the First-in, First-out (FIFO) method assume regarding the sale of inventory?
What does the First-in, First-out (FIFO) method assume regarding the sale of inventory?
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What is a key feature of the Average Cost method for inventory valuation?
What is a key feature of the Average Cost method for inventory valuation?
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Which statement best describes the impact of FIFO during periods of inflation?
Which statement best describes the impact of FIFO during periods of inflation?
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What element of financial reporting is affected by the choice of inventory cost flow method?
What element of financial reporting is affected by the choice of inventory cost flow method?
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How is the Cost of Goods Sold calculated in a periodic system?
How is the Cost of Goods Sold calculated in a periodic system?
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Which factor influences a company's choice of inventory cost flow method?
Which factor influences a company's choice of inventory cost flow method?
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A company that uses FIFO in an inflationary period will likely report which of the following?
A company that uses FIFO in an inflationary period will likely report which of the following?
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When can the chosen cost flow assumption become independent of the physical flow of goods?
When can the chosen cost flow assumption become independent of the physical flow of goods?
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Study Notes
Accounting in Action
- Accounting involves identifying, recording, and communicating economic events to decision-makers.
- Bookkeeping is the recording of economic events.
- Internal users (managers): evaluate companies' expected future performance. These reports help make key decisions.
- External users (investors, creditors, taxing authorities, regulatory agencies, customers, and labor unions): asses companies' past performance and financial health. They evaluate financial risk or suitability of investing or providing credit.
Ethics in Financial Reporting
- Ethics are standards of conduct by which actions are judged as right/wrong, fair/unfair.
- Ethics evaluation involves recognizing an ethical issue, identifying the principal elements in the situation (identifying stakeholders and their responsibilities/obligations), and weighing different options.
Accounting Standards
- Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are primary accounting standard bodies.
- These standards provide rules and guidelines for financial reporting. The aim is to ensure consistency, transparency, and comparability worldwide.
- Efforts to reduce disparities between IFRS and GAAP. This process is known as convergence.
Measurement Principles
- Relevance: financial information capable of influencing a decision.
- Faithful representation: information accurately depicts the past.
The Accounting Equation
- The accounting equation applies to all economic entities.
- Accounting equation: Assets = Liabilities + Equity
- Assets: resources owned by the business, with the capacity to provide future services or benefits.
- Liabilities: existing debts or obligations to outside parties.
- Equity: owner's claims on the company's total assets.
Financial Statements
- Income statement: Presents revenue and expenses, showing net income/loss over a period.
- Retained earnings statement: Explains the changes in retained earnings over a period.
- Statement of financial position (balance sheet): Summarizes assets, liabilities, and shareholders' equity.
- Statement of cash flows: Summarizes all cash inflows and outflows during a period. Provides evidence of a company's ability to generate cash.
The Journal
- A journal is a chronological record of all transactions.
- A journal entry records the effect of a transaction on the debit and credit sides.
- Simple entries involve two accounts, while compound entries involve three or more accounts.
The Ledger and Posting
- Ledger: a complete collection of accounts for the company.
- Posting: the process of transferring journal entries into the general ledger accounts.
The Trial Balance
- A trial balance summarizes accounts and their balances at a specific point in time to ensure debits equal credits.
- It helps locate errors if either side doesn't balance.
Adjusting Entries
- Adjusting entries are needed when the trial balance may not precisely reflect the true financial performance up to the statement date. They refine the balance sheet and income statement accounts.
- Adjusting entries involve deferrals and accruals.
- Deferrals are expenses or revenues recorded at a different point in time than the cash was exchanged.
- Accruals are expenses or revenues recognized when they're earned or incurred, rather than when cash is exchanged.
Adjusting Entries: Deferrals
- Prepaid expenses (e.g., insurance, supplies): Assets are reduced when the expense is recognized.
- Unearned revenues: Liabilities are reduced as revenue is earned.
Adjusting Entries: Accruals
- Accrued revenues (e.g., interest receivable, rent receivable or fees earned): Assets increase when revenue is recognized.
- Accrued expenses (e.g., salaries payable, interest payable, or utilities payable): Liabilities increase when expenses incurred are recognized.
Depreciation
- Depreciation is the process of cost allocation.
- Allocates the cost of plant assets over their useful life, recording them as an expense.
Closing Entries
- Closing entries finalize the temporary accounts, transferring their balances to retained earnings. Preparing for the next accounting period.
The Worksheet
- A worksheet is a multiple-column form used for adjustments and financial statements.
- Summarizes adjustments.
Classified Statement of Financial Position
- Organizes similar assets and liabilities, which aids in evaluating company health.
Inventory Cost Flow Methods
- Companies employ methods like FIFO (first-in, first-out), average cost, and LIFO (last-in, first-out) to value inventory during the accounting period.
- FIFO, which assumes the earliest goods are sold first, often results in higher net income during inflationary periods.
- Usefulness of estimated inventory methods: the gross profit method and retail inventory method help test the reasonableness of ending inventory calculations when a physical count isn't available.
Accounting for Receivables
- Companies record accounts receivable when the value from services they provide is received.
- Unearned revenue is a liability, representing money collected in advance for goods or services not yet provided.
- Companies record notes receivable at the face value to denote money loaned.
Accounting for Current Liabilities
- Current liabilities are obligations that must be paid within one year of the financial report's date. Common examples include accounts payable, short-term notes payable, unearned revenue and accruals like salaries and wages payable.
- Value-added taxes (VAT) and sales taxes are consumption taxes collected on the sale of goods and services that generate revenue for the government.
Accounting for Payroll Deductions
- Payroll deductions: deductions from employee pay for taxes, insurance premiums, union dues.
- Companies recognize these as payroll liabilities.
Payroll Taxes
- Companies are required to withhold taxes from employee paychecks and remit them to the relevant government authorities.
Accounting for Share Transactions
- Ordinary shares are the most basic type of share issued.
- Preference shares have priority over ordinary shares in dividend distributions and asset liquidation.
- Treasury shares are a company's own shares repurchased from the public.
Dividends & Splits
- Dividends are a corporation's payout to shareholders.
- A dividend split involves increasing the number of shares outstanding while adjusting the par value per share.
- A share dividend involves issuing additional shares to shareholders, thereby reducing retained earnings.
Statement of Cash Flows
- Statement of cash flows measures the cash inflows and outflows for a period.
- Cash is separated into three activities: operating, investing and financing.
- The indirect method starts with net income, then adjusts to reconcile changes in assets, liabilities and equity.
- The direct method lists the cash inflows and outflows in categories of operating, investing and financing activities.
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Description
Explore the fundamental concepts of accounting, including the processes of identifying, recording, and communicating economic events. This quiz also covers the ethics involved in financial reporting and the standards such as GAAP and IFRS. Test your understanding of how accounting informs decision-making for both internal and external users.
