Financial Statements and Accounting Principles Quiz

Overview of Financial Statements and Accounting Information System

• Financial statements are prepared to communicate a company's financial performance and position to users.

• The three forms of business organization are sole proprietorship, partnership, and corporation, each with its advantages and disadvantages.

• The Sarbanes-Oxley Act of 2002 was passed to ensure ethical financial reporting and increase penalties for fraudulent activities.

• Companies are involved in three types of activities: financing, investing, and operating, which are tracked by the accounting information system.

• The four financial statements prepared by companies are the income statement, retained earnings statement, balance sheet, and statement of cash flows.

• The classified balance sheet groups similar assets and liabilities together using several standard classifications and sections.

• Current assets, long-term investments, property, plant, and equipment, and intangible assets are the standard classifications of assets on the balance sheet.

• Current and long-term liabilities, as well as stockholders' equity, are the standard classifications of liabilities and equity on the balance sheet.

• GAAP is a set of rules and practices recognized by the accounting profession as a general guide for financial reporting purposes.

• Useful information should possess two fundamental qualities: relevance and faithful representation.

• Accounting transactions are economic events that require recording in the financial statements, and the process of identifying their specific effects on the accounting equation is called analyzing transactions.

• The recording process involves journalizing, posting, and preparing a trial balance to ensure the accounting equation is in balance.Accounting Principles and Adjusting Entries

• Trial balance is used to prove that Debits = Credits and uncover errors in account balances.

• Limitations of trial balance include unrecorded or incorrect transactions, double posting, and incorrect account usage.

• Revenue recognition principle states that revenue is recognized in the period in which it is earned.

• Service revenue is considered earned at the time the service is performed.

• Expense recognition principle matches expenses with revenues in the period when efforts are expended to generate revenues.

• Accrual-basis accounting records transactions when events occur and recognizes revenues and expenses when earned or incurred, even if cash is not received or paid.

• Cash-basis accounting violates the revenue recognition and expense recognition principles and is prohibited under GAAP.

• Adjusting entries are made to ensure the proper application of the revenue recognition and expense recognition principles.

• Adjusting entries are necessary because some events are not recorded daily and some costs expire over time.

• Types of adjusting entries include deferrals and accruals.

• Prepaid expenses are recorded as assets and are adjusted to decrease assets and increase expenses.

• Depreciation is recorded as an adjusting entry to match the cost of long-lived assets with the revenue they generate.

Overview of Financial Statements and Accounting Information System

• Financial statements are prepared to communicate a company's financial performance and position to users.

• The three forms of business organization are sole proprietorship, partnership, and corporation, each with its advantages and disadvantages.

• The Sarbanes-Oxley Act of 2002 was passed to ensure ethical financial reporting and increase penalties for fraudulent activities.

• Companies are involved in three types of activities: financing, investing, and operating, which are tracked by the accounting information system.

• The four financial statements prepared by companies are the income statement, retained earnings statement, balance sheet, and statement of cash flows.

• The classified balance sheet groups similar assets and liabilities together using several standard classifications and sections.

• Current assets, long-term investments, property, plant, and equipment, and intangible assets are the standard classifications of assets on the balance sheet.

• Current and long-term liabilities, as well as stockholders' equity, are the standard classifications of liabilities and equity on the balance sheet.

• GAAP is a set of rules and practices recognized by the accounting profession as a general guide for financial reporting purposes.

• Useful information should possess two fundamental qualities: relevance and faithful representation.

• Accounting transactions are economic events that require recording in the financial statements, and the process of identifying their specific effects on the accounting equation is called analyzing transactions.

• The recording process involves journalizing, posting, and preparing a trial balance to ensure the accounting equation is in balance.Accounting Principles and Adjusting Entries

• Trial balance is used to prove that Debits = Credits and uncover errors in account balances.

• Limitations of trial balance include unrecorded or incorrect transactions, double posting, and incorrect account usage.

• Revenue recognition principle states that revenue is recognized in the period in which it is earned.

• Service revenue is considered earned at the time the service is performed.

• Expense recognition principle matches expenses with revenues in the period when efforts are expended to generate revenues.

• Accrual-basis accounting records transactions when events occur and recognizes revenues and expenses when earned or incurred, even if cash is not received or paid.

• Cash-basis accounting violates the revenue recognition and expense recognition principles and is prohibited under GAAP.

• Adjusting entries are made to ensure the proper application of the revenue recognition and expense recognition principles.

• Adjusting entries are necessary because some events are not recorded daily and some costs expire over time.

• Types of adjusting entries include deferrals and accruals.

• Prepaid expenses are recorded as assets and are adjusted to decrease assets and increase expenses.

• Depreciation is recorded as an adjusting entry to match the cost of long-lived assets with the revenue they generate.

Overview of Financial Statements and Accounting Information System

• Financial statements are prepared to communicate a company's financial performance and position to users.

• The three forms of business organization are sole proprietorship, partnership, and corporation, each with its advantages and disadvantages.

• The Sarbanes-Oxley Act of 2002 was passed to ensure ethical financial reporting and increase penalties for fraudulent activities.

• Companies are involved in three types of activities: financing, investing, and operating, which are tracked by the accounting information system.

• The four financial statements prepared by companies are the income statement, retained earnings statement, balance sheet, and statement of cash flows.

• The classified balance sheet groups similar assets and liabilities together using several standard classifications and sections.

• Current assets, long-term investments, property, plant, and equipment, and intangible assets are the standard classifications of assets on the balance sheet.

• Current and long-term liabilities, as well as stockholders' equity, are the standard classifications of liabilities and equity on the balance sheet.

• GAAP is a set of rules and practices recognized by the accounting profession as a general guide for financial reporting purposes.

• Useful information should possess two fundamental qualities: relevance and faithful representation.

• Accounting transactions are economic events that require recording in the financial statements, and the process of identifying their specific effects on the accounting equation is called analyzing transactions.

• The recording process involves journalizing, posting, and preparing a trial balance to ensure the accounting equation is in balance.Accounting Principles and Adjusting Entries

• Trial balance is used to prove that Debits = Credits and uncover errors in account balances.

• Limitations of trial balance include unrecorded or incorrect transactions, double posting, and incorrect account usage.

• Revenue recognition principle states that revenue is recognized in the period in which it is earned.

• Service revenue is considered earned at the time the service is performed.

• Expense recognition principle matches expenses with revenues in the period when efforts are expended to generate revenues.

• Accrual-basis accounting records transactions when events occur and recognizes revenues and expenses when earned or incurred, even if cash is not received or paid.

• Cash-basis accounting violates the revenue recognition and expense recognition principles and is prohibited under GAAP.

• Adjusting entries are made to ensure the proper application of the revenue recognition and expense recognition principles.

• Adjusting entries are necessary because some events are not recorded daily and some costs expire over time.

• Types of adjusting entries include deferrals and accruals.

• Prepaid expenses are recorded as assets and are adjusted to decrease assets and increase expenses.

• Depreciation is recorded as an adjusting entry to match the cost of long-lived assets with the revenue they generate.