Accounting Principles Quiz

Canadian Accounting Standards

• IFRS (International Financial Reporting Standards) replaced GAAPs in 2011 for publicly traded Canadian businesses.
• Small to medium-sized Canadian firms typically use U.S. GAAPs.
• Public corporations use IFRS and require annual reports to adhere to these standards.

ASPE (Accounting Standards for Private Enterprises)

• ASPE is used by private Canadian businesses (those without a public listing).
• It is set by the Canadian Accounting Standards Board.
• Private corporations can choose between IFRS or ASPE.

GAAP (Generally Accepted Accounting Principles)

• GAAP is a set of broad accounting principles and practices, including rules and procedures, used for accounting information.
• It evolves over time.
• CPA Canada (formerly CICA) created GAAPs.
• GAAPs are supported by US and Canadian banks, companies, and institutions.
• Canadian Business Corporations Act and Ontario Securities Commissions recognize these standards.

Financial Statements

Balance Sheet

• Presents a company's financial position at a specific point in time (a "snapshot").
• Includes assets, liabilities, and owner's equity.
• Important for loan qualifications.
• Stakeholders: investors, managers, suppliers, customers, competitors, government, and labour unions.

Income Statement

• Also known as the profit and loss statement or statement of operations.
• Shows a company's profitability over a specified period.
• Includes revenues, expenses, gains, and losses.
• Stakeholders: lenders, investors, managers, competitors, government, and labour unions. Profitability affects new credit opportunities.

Cash Flow Statement

• Shows cash inflows and outflows during a period.
• Includes operating, investing, and financing activities.
• Operating activities convert accrual accounting to cash accounting.
• Investing activities involve assets like property, plant, and equipment.
• Financing activities relate to debt and equity.
• Includes supplemental information on items not involving cash.

Statement of Owner's Equity (Sole Proprietorship)

• Beginning Equity + Net Income - Drawings = Ending Equity

Statement of Retained Earnings (Corporation)

• Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

Statement of Partnership Equity

• Beginning capital + net income/loss - drawings = ending capital

Adjusting Entries

• Made at the end of an accounting period to adjust account balances.
• Updates related revenue and expense accounts.

Prepaid Expenses

• Items paid in advance, where revenue is recognized later.
• Prepaid expenses are assets and become expenses as they are used.

Prepaid Insurance

• Insurance premiums paid in advance require an adjusting entry.

Supplies Used

• Companies adjust for remaining supplies at the end of a period.

Unearned Revenue

• Revenue received in advance from customers.
• Recognized when the service/good is provided. A liability account.

Depreciation/Amortization

• Allocates the cost of long-term assets over their useful life.

Bad Debts

• The estimated amount of uncollectible accounts receivable.
• Matching expected loss to sales; allowance for doubtful accounts is a contra-asset account.
• Writing off bad debts removes unrecoverable accounts. Recovering a bad debt reverses the write-off entry.

Journal Entries (Various Types)

• Cash Transactions: Show cash inflows and outflows in accounting records.
• Perpetual Inventory System: Detailed tracking of inventory levels in real-time (sales record COGS).
• Periodic Inventory System: Inventory levels determined periodically; suitable for low-cost goods (one entry for sales).

Closing Accounts

• Temporary accounts (revenues, expenses, withdrawals) are set to zero to prepare for the next accounting period.
• Net income transferred to the capital account.

Reversing Entries

• Simplify adjustments for timing issues.
• Made at the start of the next accounting period.

Promissory Notes

• Written promise to pay a specific amount on a future date.
• Note Receivable: A promissory note due within a year.
• Interest: Calculated as Principal × Interest Rate × Time (in years).

Notes Receivable Entries

• Receipt of a note: DR: Notes Receivable, CR: Sales.
• Collecting a note on a future date: DR: Cash, CR: Notes Receivable, CR: Interest Receivable, CR: Interest Revenue).
• Dishonoring a note: DR: Accounts Receivable, CR: Notes Receivable, CR: Interest Revenue.

Notes Payable

• Issued when a business borrows funds.
• Issue a note: DR: Asset, CR: Notes Payable
• Paying a note: DR: Notes Payable, DR: Interest Expense, CR: Cash

Physical Inventory Counts

• Periodic counts to determine inventory levels and Cost of Goods Sold (COGS).

Inventory Valuations (Methods)

• FIFO (First-In, First-Out): Earliest goods are sold first.
• LIFO (Last-In, First-Out): Most recent goods sold first.
• Specific Identification: Cost of each item is tracked.
• Average Cost: Calculate an average cost per unit.

Gross Profit

• Revenue less the cost of goods sold (COGS).

COGS (Cost of Goods Sold)

• Expense representing the cost of merchandise sold during the period.

Internal Controls

• Systems designed to identify, assess, and protect risks.
• Includes objectives of operational efficiency, error/fraud detection, asset safeguarding, and accurate information.
• Key principles: control environment, risk assessment, control procedures, and control monitoring.

Internal Controls Over Cash Payments

• Secure cash, accurate records, separate cash handling and recordkeeping.
• Deposit cash daily, make payments by check, and use e-payments.
• Control activities: signing responsibility, human resource controls, duty segregation, and physical/IT controls.

Depreciation

• Allocates cost over an asset's useful life.

Depreciation Methods

• Straight-line: Equal amortization each year.
• Double-declining balance: Higher amortization in early years.
• Units-of-production: Amortization based on asset usage.
• Single diminishing-balance: Similar to double-declining balance without doubling rate.

Copyrights

• Intangible assets, granted by government (creator's life + 50 years). Amortize over useful life.

Journal Entries for Partnerships

• Share profits/losses based on agreed percentages.

Corporations

• Separate legal entity. Pros: limited liability, ease of raising capital, transferable ownership, continuous existence.

Issuing Cash Dividends vs. Stock Dividends

• Cash Dividends: Board declares, record payable, pay shareholders (DR: Dividends Payable, CR: Cash).
• Stock Dividends: Alternative to cash, issue more shares. (DR: Common Stock Dividend, CR: Common Stock Dividend Distributable, and issue shares).

Issuing Bonds vs. Common Shares

• Bonds: Long-term debt, promise to pay interest and principal.
• Interest Expense: Accrued interest is recorded at end of each period.
• Bonds Payable: Liability account.

Bonds for Long-Term Financing

• Long-term debt with scheduled principal and interest payments.

Debt vs. Equity Financing

• Debt Financing: Borrowed money; regular interest payments.
• Equity Financing: Owners' investments; no interest payments.

Financial Ratios

• Liquidity: Working capital, current ratio, quick ratio, inventory to net working capital.
• Efficiency: Inventory turnover, inventory turnover period, accounts receivable turnover, accounts receivable turnover period, accounts payable turnover, days to pay accounts payable, operating inventory cycle, days' sales outstanding.
• Solvency: Times interest earned, equity ratio, debt ratio, debt-to-equity ratio.
• Profitability: Profit margin, gross profit margin, return on equity, return on assets, earnings per share.

Cash Flow Statement

• Direct Method: Shows cash inflows and outflows directly.
• Indirect Method: Starts with net income and adjusts for non-cash items.

Steps for Indirect Method

• (1) Start with net income (2) Add non-cash expenses (3) Add losses from asset sales (4) Deduct gains from asset sales (5) Analyze changes in current assets/liabilities.

Test your knowledge of essential accounting principles, including goodwill calculation, depreciation methods, and internal control activities. This quiz covers various aspects of financial accounting and partnership profit sharing.