Accounting Principles

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Questions and Answers

What is a key distinction between accounting and other business functions?

Accounting deals exclusively with numbers

Accounting must be performed by an outsider

Accounting offers insight into business financial soundness (correct)

Accounting involves mainly clerical activities

What is necessary to effectively run a business?

Understanding and using accounting information (correct)

Using a public accounting firm

Not spending too much time on the accounting system

Hiring a full-time accountant

What is an example of a financial transaction?

Reviewing financial statements

Purchasing a fire insurance policy (correct)

Accessing a firm's web page

Discovering an error in inventory valuation

What is the overall purpose of accounting?

To provide financial information to decision makers Signup and view all the answers

What is NOT a primary function of accounting?

Managing business operations Signup and view all the answers

Why is accounting important in business?

It provides insight into financial soundness Signup and view all the answers

Who can use accounting information?

Managers, owners, creditors, employees, and the government Signup and view all the answers

What do accountants do with the financial information they gather?

Interpret Signup and view all the answers

What is the primary purpose of financial statements prepared by accountants?

To provide information to decision-makers inside and outside the organization Signup and view all the answers

Which organization defines generally accepted accounting principles?

FASB Signup and view all the answers

What can help assess the health of a business?

Financial statements Signup and view all the answers

Which activity would affect a firm's account balances?

Buying and selling goods and services Signup and view all the answers

What is good advice for a person starting a business?

Select an accounting system that helps you make decisions and report information to others Signup and view all the answers

What is an accountant's responsibility?

Summarizing and interpreting financial information Signup and view all the answers

What is the best response to Tracy's comment about not worrying about accounting?

You'll still need to know how to read, understand, and interpret basic accounting reports Signup and view all the answers

What is the primary focus of Blake's plan?

To increase revenues and profits Signup and view all the answers

What advice would you give to Terry regarding his receipts and business expenses?

Explore an accounting system to classify and summarize information Signup and view all the answers

What is the first step in the accounting cycle?

Bookkeeping Signup and view all the answers

What is the accounting practice of recording each transaction in two places in the accounting journal?

Double-entry bookkeeping Signup and view all the answers

What is a specialized accounting book that categorizes transactions according to type?

Ledger Signup and view all the answers

What is the first task of a bookkeeper?

Separate transactions into meaningful categories Signup and view all the answers

What is the role of a bookkeeper?

Record business transactions Signup and view all the answers

What is the accounting book or computer program where each day's transactions are first recorded?

Journal Signup and view all the answers

What is the purpose of a trial balance?

To affirm whether the figures in the account ledgers are correct and balanced Signup and view all the answers

What is the six-step procedure that results in the preparation and analysis of the major financial statements?

Accounting cycle Signup and view all the answers

Which financial statement is prepared in the fifth step of the accounting cycle?

Statement of cash flows Signup and view all the answers

Which of the following is a key step in the accounting cycle?

Recording information into journals Signup and view all the answers

Why does an accountant conduct a trial balance?

To determine whether account figures in the ledger are correct and balanced Signup and view all the answers

What is the role of computers in accounting?

They are tools to help the accountant perform their job Signup and view all the answers

What is the purpose of bookkeeping?

To record financial information Signup and view all the answers

What is the name of the financial statement that shows the financial position of a company at a specific point in time?

Balance sheet Signup and view all the answers

What is the sixth and final step in the accounting cycle?

Analyzing major accounting statements to evaluate the financial condition of the firm Signup and view all the answers

What is the role of an accountant?

To assist in interpreting financial information Signup and view all the answers

What type of accountant would investigate a company's financial records?

Forensic accountant Signup and view all the answers

Where would Chloe post journal entries?

Ledger Signup and view all the answers

Which financial statement reports the financial condition of a firm at a specific point in time?

Balance sheet Signup and view all the answers

What type of account lists assets, liabilities, and owners' equity of a firm?

Balance sheet Signup and view all the answers

What refers to how quickly an asset can be converted into cash?

Liquidity Signup and view all the answers

What is the most liquid asset?

Cash Signup and view all the answers

What is the fundamental accounting equation?

Assets = liabilities plus owners' equity Signup and view all the answers

What type of account shows profits that the firm has reinvested in the company?

Retained earnings Signup and view all the answers

What is the monetary value received for goods sold, services rendered, and money received from other sources?

Revenue Signup and view all the answers

What type of asset is a patent or copyright?

Intangible asset Signup and view all the answers

What type of account lists debts that are due in one year or less?

Current liabilities Signup and view all the answers

What type of financial statement reports the profit or loss for the firm over a specified time period?

Income statement Signup and view all the answers

What would be the likely outcome for Diego's small business if it adopts a computerized accounting system?

It would be beneficial with consultation from an accountant. Signup and view all the answers

What is the record book or computer program referred to where Ivy records the firm's transactions?

Journal Signup and view all the answers

What is the next step in the accounting process after George records all transactions into journals?

Post the information to the ledger Signup and view all the answers

What helps minimize entry errors in Alex's company?

Double-entry bookkeeping Signup and view all the answers

What is Audrey's goal when preparing a trial balance?

To ensure the accounts are balanced Signup and view all the answers

What is Nathan's next task after completing a trial balance with no unexpected problems?

Preparing the store's balance sheet and other major financial statements Signup and view all the answers

What is the next step in the accounting cycle after Brody finishes working on the financial statements?

Analyzing the firm's financial statements to evaluate the financial condition of the firm Signup and view all the answers

What is an advantage of PharmaONE's computerized accounting system?

Readily available financial information Signup and view all the answers

How would a computerized accounting system help Personalized Products?

By helping management identify cash flow and other financial difficulties more quickly Signup and view all the answers

What are the three important financial statements prepared by accountants?

Balance sheet, income statement, and cash flow statement Signup and view all the answers

What is net profit referred to as?

the net earnings after the deduction of all expenses, including tax expense Signup and view all the answers

Where is depreciation typically listed?

the income statement Signup and view all the answers

What does the statement of cash flows identify?

cash receipts and disbursements that result from a firm's operations, investment, and financing activities Signup and view all the answers

What is the Fundamental Accounting Equation?

Assets = Liabilities + Owners' equity Signup and view all the answers

What is shown at the bottom line of an income statement?

net income or net loss Signup and view all the answers

What type of expenses are insurance, office salaries, and rent classified as?

general expenses on an income statement Signup and view all the answers

What are debts owed by a business called?

liabilities Signup and view all the answers

What is the process of systematically writing off the value of a tangible asset over its useful life?

depreciation Signup and view all the answers

What financial statement shows how the capital is structured in the business?

balance sheet Signup and view all the answers

What is the purpose of an income statement?

to show a company's ability to earn a profit over time Signup and view all the answers

What is a common issue faced by companies when customers who buy on credit don't pay on time?

Managing cash flows Signup and view all the answers

Which inventory valuation method bases the cost of goods sold on the cost of the most recent merchandise purchased?

LIFO (last-in, first-out) Signup and view all the answers

During a period of rising prices, which inventory valuation method will result in higher net income figures?

FIFO (first-in, first-out) Signup and view all the answers

What is the assumption made by the FIFO method of inventory valuation?

Selling the oldest merchandise first Signup and view all the answers

What is the main goal of a company using the LIFO method of inventory valuation during a period of rising prices?

To report lower net income figures Signup and view all the answers

What type of account would an accountant list valuable possessions like a laptop computer as?

Assets Signup and view all the answers

What type of account would an accountant classify student loans as?

Liabilities Signup and view all the answers

What type of account would an accountant classify a corporate bond as?

Long-term liability Signup and view all the answers

What accounts are used to calculate gross profit on an income statement?

Revenues, cost of goods sold Signup and view all the answers

Study Notes

Here are the study notes for the provided text:

Accounting Basics

Accounting is essential for businesses as it provides financial information to decision makers.

Differences between Accounting and Other Business Functions

Accounting involves recording, classifying, and interpreting financial information, which is different from other business functions like marketing and management.

Accounting Transactions

A financial transaction is an event that affects a firm's financial position, such as purchasing a fire insurance policy.
Examples of financial transactions include buying and selling goods and services.

Purpose of Accounting

The overall purpose of accounting is to provide financial information that is useful to decision makers, including managers, owners, creditors, employees, and the government.

Accountants' Responsibilities

Accountants record, classify, and interpret financial information.
Accountants summarize and interpret financial information needed by managers and other stakeholders.

Financial Statements

Financial statements are reports that provide financial information about a firm.
The three key financial statements are:
- Balance Sheet: reports a firm's financial condition at a specific point in time.
- Income Statement: reports a firm's revenues and expenses over a specified time period.
- Statement of Cash Flows: reports the company's cash inflows and outflows over a specified time period.

Accounting Cycle

The accounting cycle is a six-step procedure that results in the preparation and analysis of financial statements.
The steps in the accounting cycle are:
1. Recording transactions in a journal.
2. Posting the information to the ledger.
3. Preparing a trial balance.
4. Preparing financial statements.
5. Analyzing financial statements.
6. Interpreting financial statements.

Bookkeeping vs. Accounting

Bookkeeping involves recording financial information, while accounting is concerned with classifying, summarizing, and interpreting financial information.

Computerized Accounting Systems

Computerized accounting systems help firms generate financial information quickly and efficiently.
These systems reduce the pressure on managers in making financial decisions.

Accounting Tools and Techniques

Double-entry bookkeeping is an accounting practice that records each transaction in two places in the accounting journal.
A ledger is a specialized accounting book where transactions are categorized according to type.
A trial balance is a summary of all the data from the account ledgers to verify that they are correct and balanced.### Accounting Basics
Company resources that are purchased with the intention of converting to cash within one year are called current assets.
Resources that a firm owns are called assets.
The most liquid asset is cash.
Patents and copyrights are classified as intangible assets on the Balance Sheet.
Debts that are due in one year or less are classified on the Balance Sheet as current liabilities.
The value of resources the firm owns, minus the amount of money the firm owes to others, equals owners' equity.

Balance Sheet

The Balance Sheet shows the value of resources the firm owns, minus the amount of money the firm owes to others, at a specific point in time.
The Balance Sheet is set up to reflect the Fundamental Accounting Equation: Assets = Liabilities + Owners' equity.

Income Statement

Revenue is the monetary value received for goods sold, services rendered, and money received from other sources.
Gross profit is revenue minus cost of goods sold.
Net income is the result of deducting all expenses, including tax expense, from revenues.
Depreciation is a systematic write-off of the cost of a tangible asset over its useful life, listed on the Income Statement.
General expenses are classified as operating expenses on the Income Statement.
The bottom line of an Income Statement shows the firm's net income or net loss.

Statement of Cash Flows

The Statement of Cash Flows identifies cash receipts and disbursements that result from a firm's operations, investment, and financing activities.
The Statement of Cash Flows shows how a firm's cash changes over time.

Inventory Valuation

FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) are two common inventory valuation methods.
The LIFO method bases the cost of goods sold on the cost of the most recent merchandise purchased by the firm.
During a period of rising prices, using FIFO will result in higher net income figures than would LIFO.

Liabilities and Equity

Debts owed by a business are called liabilities.
The Fundamental Accounting Equation is: Assets = Liabilities + Owners' equity.
Owners' equity equals the value of resources the firm owns, minus the amount of money the firm owes to others.

Other

Retained earnings are profits that the firm has reinvested in the company.
Assets minus liabilities equals owners' equity.
Cash flow management is important for rapidly growing companies.

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Description

This quiz assesses your understanding of the fundamental principles of accounting, including its role in business and its differences from other functions. Test your knowledge of accounting concepts and practices.