Core Accounting Concepts Quiz

Core Accounting Concepts

• Assets are resources controlled by a company expected to generate future economic benefits. They can be tangible (physical) or intangible (non-physical).
• Liabilities are obligations to pay money or provide goods/services in the future. They represent future cash outflows.
• Equity is the residual interest in a company's assets after deducting liabilities. It represents the owners' stake. Equity = Assets - Liabilities
• Revenue is income generated from normal business operations. It's calculated as the average sales price times the number of units sold, and is also known as sales.
• Expenses are costs incurred in generating revenue. They are subtracted from revenue to determine net income.
• Net Income is the profit or loss after deducting all expenses from revenue. It's a key indicator of profitability.
• Cash Flow is the movement of money into and out of a company over a period. Positive cash flow signifies more money coming in than going out.
• Accrual Accounting recognizes revenue when earned and expenses when incurred, regardless of when cash is received or paid.

Financial Statements

• Balance Sheet: A snapshot of a company's financial position at a specific time. It shows assets, liabilities, and equity. Assets = Liabilities + Equity.
• Income Statement: Summarizes revenues and expenses over a specific period. Shows the company's profit or loss for that period. It's also known as the profit and loss (P&L) or statement of revenue and expense statement.
• Statement of Cash Flows: Shows how a company's cash balance changed over a period. Categorizes cash flows into operating activities, investing activities, and financing activities.

Subtopics and Additional Concepts

• Current Assets: Assets expected to convert to cash within a year (e.g., cash, accounts receivable, inventory).
• Current Liabilities: Liabilities due within a year (e.g., accounts payable, salaries payable, short-term loans).
• Working Capital: The difference between current assets and current liabilities, indicating a company's short-term financial capacity.
• Depreciation: The systematic allocation of a tangible asset's cost over its useful life, reflecting its gradual decline in value.
• Amortization: The systematic allocation of an intangible asset's cost over its useful life.

Cash Flow Concepts

• Cash Equivalents: Highly liquid, short-term investments easily converted to cash (e.g., treasury bills, commercial paper).
• Petty Cash: Small amount of cash kept on hand for minor expenses.
• Operating Cash Flow: Cash flows from a company's normal business operations. Includes cash received from customers and paid to suppliers/employees.
• Investing Cash Flow: Cash flows related to the purchase or sale of long-term assets (e.g., property, plant, equipment).
• Financing Cash Flow: Cash flows related to raising or repaying debt or equity. Includes issuing bonds, stock, or repaying loans/dividends.
• Cash Reserves: A pool of cash held for unexpected expenses or opportunities.
• Cash on Hand: The total cash available at a specific point in time.
• Cash Balances: The total cash held, including cash on hand and cash equivalents.
• Restricted Cash: Cash not readily available due to legal or contractual restrictions.
• Free Cash Flow: Cash flow remaining after paying operating and capital expenses. Used for dividends, share repurchases, or further investments.

Accounts Receivable Concepts

• Accounts Receivable (AR): Money owed to a company by customers for goods/services delivered but not paid.
• Net Accounts Receivable: Expected collectible amount (i.e., gross AR minus allowance for doubtful accounts).
• Allowance for Doubtful Accounts: Estimated amount of AR not expected to be collected.
• Cash Turnover: A measure of how efficiently a company is using its cash to generate revenue (revenue/average cash balance).
• Net Cash Flow: The difference in cash inflows and outflows over a period.
• Cash Surplus/Deficit: A surplus is more cash on hand than is necessary to meet obligations; a deficit is not enough cash.
• Cash Reconciliation: Comparing a company's bank statement to internal cash records to identify discrepancies.
• Cash Conversion Cycle: The time a company takes to convert inventory into cash.

Other Accounting Concepts

• Bad Debt Expense: Expense representing uncollectible accounts receivable.
• Aging of Accounts Receivable: Schedule showing amounts of AR outstanding for different periods, assessing collectability.
• Accounts Receivable Turnover Ratio: Measure of how efficiently a company collects AR (revenue/average AR).
• Average Collection Period: Average number of days it takes to collect AR (365 days/accounts receivable turnover).
• Days Sales Outstanding (DSO): Another measure of AR collection efficiency (average AR / average daily sales).
• Trade Receivables: AR from ordinary business sales.
• Uncollectible Accounts: AR determined non-collectible by the company.
• Gross Accounts Receivable: Total outstanding AR.
• Credit Sales: Sales made on credit where payment is not required immediately.
• Receivables Management: The process of managing accounts receivable to ensure efficient collection.
• Invoice Processing: Creating and sending invoices to customers.
• Collection Process: Collecting payments from customers.
• Write-offs: Removing uncollectible accounts receivable from the books.
• Receivables Financing: Obtaining financing using accounts receivable as collateral.
• Factoring of Receivables: Selling AR to a third-party for a discount.
• Pledged Accounts Receivable: AR used as collateral for a loan.
• AR Aging Report: Report showing outstanding AR amounts over periods for assessing collectability.