Financial Accounting Concepts Quiz

Fundamental Concepts

• Financial accounting systematically records, summarizes, and reports a company's financial transactions.
• Its goal is to provide accurate and reliable information for external users (investors, creditors, regulators).
• It focuses on historical data, unlike managerial accounting which focuses on future projections.
• Financial statements are the core output, including the balance sheet, income statement, and statement of cash flows.

The Balance Sheet

• The balance sheet shows a company's financial position at a specific moment in time.
• It follows the accounting equation: Assets = Liabilities + Equity.
• Assets represent company holdings (cash, accounts receivable, equipment).
• Liabilities represent obligations to others (accounts payable, loans).
• Equity is the residual interest in assets after deducting liabilities.

The Income Statement

• The income statement displays a company's financial performance over a period (quarter, year).
• It summarizes revenues and expenses during that period.
• Net income/loss is the difference between revenues and expenses.
• The formula is: Revenue - Expenses = Net Income/Loss.

The Statement of Cash Flows

• The statement of cash flows tracks cash inflows and outflows over a period.
• It categorizes cash flows into operating, investing, and financing activities.
• Operating activities concern day-to-day business operations.
• Investing activities involve buying and selling long-term assets.
• Financing activities include debt issuance, dividend payments, and stock issuance.

Accounting Principles and Standards

• GAAP (Generally Accepted Accounting Principles) are US standards for financial statements.
• IFRS (International Financial Reporting Standards) are global accounting standards.
• These standards ensure consistency, comparability, and reliability of financial information globally.
• Key principles include accrual accounting and the matching principle.
• Accrual accounting records revenues when earned and expenses when incurred (as opposed to cash accounting).
• The matching principle links expenses to revenues in the same accounting period.

Key Financial Ratios

• Financial ratios help understand a company's financial performance compared to its industry.
• Examples include profitability ratios (earnings relative to revenue), liquidity ratios (short-term obligation meeting ability), and solvency ratios (long-term obligation meeting ability).

Accounting Cycle

• The accounting cycle is a systematic process for recording and reporting financial transactions.
• It starts with analyzing transactions and recording them in journals.
• Next, journal entries are posted to the ledger (categorizing transactions).
• An unadjusted trial balance is then prepared.
• Adjusting entries reflect accrued revenues, accrued expenses, deferrals, and depreciation.
• A post-closing trial balance is completed.
• Financial statements are prepared from ending balance sheet and income statement accounts, using adjusting entries from prior periods.

Debits and Credits

• Debits and credits are used for recording transactions.
• Debits increase asset, expense, and dividend accounts.
• Credits increase liability, equity, and revenue accounts.
• Double-entry bookkeeping ensures debits always equal credits for each transaction.

Accounting Equation

• The accounting equation (Assets = Liabilities + Equity) is the foundation of the balance sheet.
• Every transaction maintains the balance of this equation.

Types of Accounts

• Assets are the company's resources.
• Liabilities are obligations to others.
• Equity represents owners' stake in company assets.
• Revenue increases equity from goods/service delivery.
• Expenses decrease equity from business operations.