Partnership Accounts Adjustments

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Questions and Answers

What is the meaning of "asset"?

An asset is a resource controlled by the company as a result of past events and from which future economic benefits are expected to flow to the company.

The ratio of the profit earned by the company to the capital employed is called the [BLANK] on capital.

return

How is the return on capital calculated? Provide the formula.

Return on Capital = Profit / Capital Employed. (Where capital employed is the total amount of capital invested in a business.)

What is the difference between gross profit and return on capital?

Gross profit is the difference between revenue and the cost of goods sold, providing a measure of a company’s profitability at the fundamental level. Return on capital, however, is a broader financial metric which considers how effectively a company utilizes its overall capital to generate profits. Signup and view all the answers

Briefly explain the concept of "goodwill".

Goodwill is an intangible asset that arises when a company acquires another company for a price that is higher than the fair value of its identifiable net assets. This excess amount paid represents the value of the acquired company’s brand reputation, customer relationships, and other intangible factors. Signup and view all the answers

What is the purpose of "depreciation" in accounting?

Depreciation is the process of allocating the cost of a tangible asset over its estimated useful life. This accounts for the gradual decline in value of an asset due to use, wear and tear, or obsolescence. The depreciation expense is recorded each year to reflect the asset's decreasing value. Signup and view all the answers

What is the main difference between "fixed costs" and "variable costs" in accounting?

Fixed costs remain relatively constant regardless of the level of production or sales, while variable costs fluctuate directly with changes in production or sales volume. Fixed costs, such as rent or salaries, are incurred consistently, while variable costs include expenses such as raw materials or packaging, which vary based on production needs. Signup and view all the answers

Which of the following is NOT a primary advantage of using a limited liability company (LLC) structure for a business?

Double Taxation (D) Signup and view all the answers

A sole proprietorship is a business entity that is legally distinct from its owner.

False (B) Signup and view all the answers

What is a "balance sheet" in financial accounting?

A balance sheet is a financial statement which provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. It follows the fundamental accounting equation: Assets = Liabilities + Equity. Signup and view all the answers

What is the purpose of an "income statement"?

An income statement, also called a profit and loss statement, summarizes a company's revenues and expenses over a specific period, typically a quarter or a year. It determines a company's net income (profit) or loss by subtracting total expenses from total revenues. Signup and view all the answers

What is the main purpose of a "cash flow statement"?

A cash flow statement tracks the movement of cash both into and out of a company during a specified period. It helps companies understand how cash is generated and used, providing insights into its cash balance, liquidity, and ability to meet financial obligations. Signup and view all the answers

What is the difference between a "budget" and a "forecast"?

A budget is a planned financial statement detailing expected revenues and expenses over a future period, primarily used for managing cash flow and resource allocation. A forecast, on the other hand, is a prediction of future financial outcomes based on past data and current trends. It is a more forward-looking tool that helps businesses anticipate future financial performance. Signup and view all the answers

Explain the main difference between "debt financing" and "equity financing".

Debt financing involves borrowing money from lenders, who expect repayment with interest. Equity financing, on the other hand, involves selling ownership shares of the company in exchange for capital investment, giving investors a stake in the company. These financing methods offer different levels of control and risk for the business. Signup and view all the answers

Flashcards

Goodwill

The difference between the fair market value of a business and its tangible assets. It reflects factors like brand reputation, customer loyalty, and skilled employees.

Profit Sharing Ratio

The proportion of profits each partner receives. It's typically expressed as a ratio.

Admission of a New Partner

The process of adjusting the profit sharing ratio when a new partner joins the firm.

Contribution to Capital

When a new partner brings in money, it increases the firm's capital. It can be an initial investment or an increase in existing capital.