Core Accounting Concepts Quiz
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Questions and Answers

What term describes resources controlled by a company with the expectation of future economic benefits?

  • Assets (correct)
  • Expenses
  • Liabilities
  • Equity

    • What is the primary purpose of liabilities in accounting?

  • To represent responsibilities owed to other entities (correct)
  • To indicate the owner's investment
  • To summarize a company's profits
  • To showcase cash inflows

    • Which formula accurately describes equity?

  • Liabilities - Assets
  • Revenue - Expenses
  • Assets - Liabilities (correct)
  • Assets + Liabilities

    • How is revenue calculated?

    <p>Average sales price times number of units sold</p> Signup and view all the answers

    What do expenses represent in accounting?

    <p>Costs incurred to generate revenue</p> Signup and view all the answers

    What is net income also referred to as?

    <p>Profit or Loss</p> Signup and view all the answers

    Which statement best describes cash flow?

    <p>Movement of money over time</p> Signup and view all the answers

    What does a balance sheet represent?

    <p>A snapshot of assets, liabilities, and equity</p> Signup and view all the answers

    What is the income statement also known as?

    <p>Profit and Loss Statement</p> Signup and view all the answers

    Which category of cash flows includes cash from the company's main business operations?

    <p>Operating Activities</p> Signup and view all the answers

    What is defined as current assets?

    <p>Assets that can be converted into cash within one year</p> Signup and view all the answers

    What does working capital represent?

    <p>The difference between current assets and current liabilities</p> Signup and view all the answers

    What is depreciation?

    <p>The systematic allocation of tangible asset cost</p> Signup and view all the answers

    What does gross profit represent?

    <p>Revenue minus cost of goods sold</p> Signup and view all the answers

    What are retained earnings?

    <p>Accumulated profits not distributed as dividends</p> Signup and view all the answers

    What are financial ratios used to assess?

    <p>Company's financial health and performance</p> Signup and view all the answers

    What does the Allowance for Doubtful Accounts represent?

    <p>The amount of accounts receivable deemed uncollectible</p> Signup and view all the answers

    What does free cash flow represent for a company?

    <p>Cash flow after paying operating expenses and capital expenditures.</p> Signup and view all the answers

    How is the Average Collection Period calculated?

    <p>365 days divided by accounts receivable turnover ratio</p> Signup and view all the answers

    Which of the following best defines restricted cash?

    <p>Cash that is subject to restrictions preventing its immediate use.</p> Signup and view all the answers

    Which of the following is a measure of how efficiently a company collects its accounts receivable?

    <p>Days Sales Outstanding (DSO)</p> Signup and view all the answers

    What is cash management primarily concerned with?

    <p>Ensuring sufficient cash flow to meet obligations and opportunities.</p> Signup and view all the answers

    What is meant by the term 'Bad Debt Expense'?

    <p>The amount written off as uncollectible receivables</p> Signup and view all the answers

    What does a cash budget forecast?

    <p>Future cash inflows and outflows.</p> Signup and view all the answers

    What does the Accounts Receivable Turnover Ratio measure?

    <p>The speed of converting accounts receivable into cash</p> Signup and view all the answers

    How is net cash flow calculated?

    <p>Total cash inflows minus total cash outflows.</p> Signup and view all the answers

    What is the purpose of Aging of Accounts Receivable?

    <p>To assess the collectability of outstanding receivables</p> Signup and view all the answers

    What is measured by liquidity ratios?

    <p>A company's ability to meet short-term financial obligations.</p> Signup and view all the answers

    What are Trade Receivables?

    <p>Accounts receivable arising from ordinary business transactions</p> Signup and view all the answers

    What does cash turnover measure?

    <p>How efficiently cash is used to generate revenue.</p> Signup and view all the answers

    Which factor is included in the formula for calculating Days Sales Outstanding (DSO)?

    <p>Average daily sales</p> Signup and view all the answers

    What does a cash surplus indicate about a company?

    <p>It holds more cash than necessary for current obligations.</p> Signup and view all the answers

    Study Notes

    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.

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    Core Accounting Concepts PDF

    Description

    Test your knowledge of essential accounting concepts such as assets, liabilities, equity, revenue, and expenses. This quiz will help you understand how these elements interact to determine a company's financial health. Perfect for anyone studying accounting or finance.

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