Financial Accounting Basics

Questions and Answers

What is the primary purpose of financial accounting?

To audit financial statements

To prepare tax returns

To provide financial information to external users (correct)

To provide internal reports for management

Which of the following is not one of the primary financial statements?

Balance Sheet

Statement of Cash Flows

Budget Report (correct)

Income Statement

In double-entry bookkeeping, each transaction affects at least:

Four accounts

Three accounts

One account

Two accounts (correct)

The accounting equation is:

Assets = Liabilities + Equity Signup and view all the answers

Which accounting method records revenues and expenses when they are incurred, regardless of when cash is exchanged?

Accrual basis accounting Signup and view all the answers

Which of the following is an example of an adjusting entry?

Recording depreciation expense Signup and view all the answers

Under accrual basis accounting, when are revenues recognized?

When they are earned Signup and view all the answers

Which statement is correct regarding current assets?

They are expected to be used or converted into cash within one year Signup and view all the answers

Which of the following is classified as a non-current liability?

Notes Payable (due in 2 years) Signup and view all the answers

Which principle requires accountants to adhere to a set of guidelines and ethical standards?

Generally Accepted Accounting Principles (GAAP) Signup and view all the answers

Study Notes

Financial Accounting Basics

The primary purpose of financial accounting is to provide financial information to external users.

Financial Statements

The primary financial statements include: Balance Sheet, Income Statement, and Statement of Cash Flows.
Budget Report is not one of the primary financial statements.

Double-Entry Bookkeeping

In double-entry bookkeeping, each transaction affects at least two accounts.

Accounting Equation

The accounting equation is: Assets = Liabilities + Equity.

Accounting Methods

The accrual basis accounting method records revenues and expenses when they are incurred, regardless of when cash is exchanged.
The cash basis accounting method does not record revenues and expenses until cash is exchanged.

Adjusting Entries

Recording depreciation expense is an example of an adjusting entry.
Adjusting entries are used to match revenues and expenses to the correct period.

Revenue Recognition

Under accrual basis accounting, revenues are recognized when they are earned, not when cash is received.

Assets Classification

Current assets are expected to be used or converted into cash within one year.
Examples of current assets include: cash, accounts receivable, and inventory.

Liabilities Classification

Non-current liabilities are long-term debts that are not expected to be paid within one year.
Examples of non-current liabilities include: notes payable, bonds payable, and mortgages payable.