Fundamental Accounting Concepts Quiz

Chapter 1: Fundamental Accounting Concepts

• The fundamental accounting equation is Assets = Liabilities + Stockholders' Equity.
• Assets represent a company's economic resources, including cash, inventory, and buildings.
• Liabilities represent financing from creditors, such as amounts owed to suppliers, employees, or banks.
• Stockholders' Equity represents financing from stockholders, including common stock, retained earnings, and dividends.
• Generally Accepted Accounting Principles (GAAP) are principles for financial reporting, covering ethical issues
• Ethics in accounting are concerned with right and wrong, involving identifying ethical concerns, analyzing options, and making ethical decisions.

Chapter 2: Asset Accounts

• Asset Accounts are categorized as current or non-current.
• Current Assets are expected to be used within one year or the operating cycle (longer period if applicable). Examples include cash, short-term investments, accounts receivable, inventory, and prepaid expenses.
• Non-Current Assets are used for longer than a year or operating cycle. Examples include long-term investments, plant assets (land, equipment, buildings), and intangible assets (like trademarks, patents).
• Liabilities include accounts payable (owed to vendors), and notes payable.
• Equity accounts include common stock, dividends, revenues (increases equity), and expenses (decrease equity).
• Retained Earnings represents accumulated profits (or losses) not paid out as dividends, calculated as Beginning Retained Earnings + Net Income - Dividends.
• Income Statement calculates Net Income = Revenue - Expenses.
• Statement of Retained Earnings shows how retained earnings changed over a period, calculated as Ending Retained Earnings = Beginning Retained Earnings + Net Income – Dividends.
• Balance Sheet summarizes a company's financial position. Assets = Liabilities + Equity (including retained earnings).

Chapter 3: Accrual vs. Cash Accounting

• Accrual Accounting records revenue when earned and expenses when incurred, regardless of when cash changes hands. This better reflects underlying economics.
• Cash Accounting records revenue when cash is received and expenses when paid.
• Accrued Revenues/Receivables are revenues earned but not yet received in cash.
• Accrued Expenses/Payables are expenses incurred but not yet paid in cash.
• Deferred Revenues (Unearned Revenues) are cash received before services are provided.
• Deferred Expenses (Prepaid Expenses) are cash paid before expenses are incurred.
• Revenue Recognition Principle: Revenue is recognized when a company satisfies its performance obligations under a contract, not necessarily when cash is received.
• Closing Entries: These adjust accounts at the end of an accounting period to prepare for the next period. The key steps include closing credit balances in revenue accounts and debit balances in expense accounts to the Income Summary account, then closing Income Summary to Retained Earnings, and finally closing Dividends to Retained Earnings.