1. Basics of Financial Accounting Flashcards
(124 cards)
1
Q
What is financial accounting?
A
It’s the process of recording, summarizing, and reporting financial transactions to provide useful information for decision-making.
2
Q
Who are the primary users of financial accounting information?
A
External users like investors, creditors, and regulators.
3
Q
What is GAAP?
A
Generally Accepted Accounting Principles, the standard framework of guidelines for financial accounting.
4
Q
What does IFRS stand for?
A
International Financial Reporting Standards.
5
Q
What is double-entry accounting?
A
A system where every transaction affects at least two accounts, maintaining the accounting equation.
6
Q
What is the accounting equation?
A
Assets = Liabilities + Equity.
7
Q
What are the main financial statements?
A
Income Statement, Balance Sheet, Statement of Cash Flows, and Statement of
8
Q
What is an asset?
A
A resource owned by a business that provides future economic benefit.
9
Q
What is a liability?
A
A present obligation of the entity arising from past events.
10
Q
What is equity?
A
The residual interest in the assets of the entity after deducting liabilities.
11
Q
What does the income statement show?
A
The company’s revenues and expenses over a period of time.
12
Q
What is revenue?
A
Income earned from normal business operations.
13
Q
What is an expense?
A
The cost incurred to generate revenue.
14
Q
What is net income?
A
Revenue - Expenses.
15
Q
What is gross profit?
A
Sales Revenue - Cost of Goods Sold (COGS).
16
Q
What is operating profit?
A
Gross Profit - Operating Expenses.
17
Q
What is the difference between accrual and cash accounting?
A
Accrual records income and expenses when incurred; cash records when money is exchanged.
18
Q
What does a balance sheet show?
A
The financial position of a business at a specific point in time.
19
Q
What are current assets?
A
Assets expected to be converted to cash within a year.
20
Q
What are non-current assets?
A
Assets expected to provide economic benefit beyond one year.
21
Q
What are examples of current liabilities?
A
Accounts payable, short-term loans, and accrued expenses.
22
Q
What is working capital?
A
Current Assets - Current Liabilities.
23
Q
What are the three sections of the cash flow statement?
A
Operating, Investing, and Financing activities.
24
Q
What is cash from operating activities?
A
Cash generated from the core business operations.
25
What is cash from investing activities?
Cash related to buying/selling long-term assets.
26
What is depreciation?
The allocation of the cost of an asset over its useful life.
27
What is amortization?
The reduction of an intangible asset's value over time.
28
What is accrual?
Recording revenues/expenses when they are earned/incurred, not when cash is exchanged.
29
What is a deferral?
Postponing recognition of revenue/expense to a later period.
30
What is a prepaid expense?
A payment made in advance for a future expense.
31
What is unearned revenue?
Cash received before a service is performed.
32
What is inventory?
Goods available for sale to customers.
33
What are the main inventory costing methods?
FIFO, LIFO, and Weighted Average.
34
What is FIFO?
First In, First Out – oldest inventory is sold first.
35
What is LIFO?
Last In, First Out – newest inventory is sold first.
36
What is COGS?
Cost of Goods Sold – the cost of inventory sold during a period.
37
What is the current ratio?
Current Assets ÷ Current Liabilities.
38
What is the quick ratio?
(Current Assets - Inventory) ÷ Current Liabilities.
39
What is return on equity (ROE)?
Net Income ÷ Equity.
40
What is return on assets (ROA)?
Net Income ÷ Total Assets.
41
What is the debt-to-equity ratio?
Total Liabilities ÷ Equity.
42
What is EPS?
Earnings Per Share = Net Income ÷ Number of Shares.
43
What is a journal entry?
A record of a transaction in the accounting system.
44
What does every journal entry include?
A debit and a credit.
45
What is a ledger?
A book or digital record where transactions are grouped by account.
46
What is the trial balance?
A summary of all ledger accounts and their balances.
47
What is retained earnings?
Cumulative net income kept in the business after dividends.
48
What is a dividend?
A distribution of profits to shareholders.
49
What is share capital?
Funds raised by issuing shares.
50
Is “Prepaid Insurance” an asset or expense?
Asset
51
Is “Accounts Payable” a liability or equity?
Liability
52
Is “Salaries Payable” a current or non-current liability?
Current liability.
53
Is “Land” depreciated?
No, land is not depreciated.
54
Is “Unearned Revenue” a liability or revenue?
Liability
55
Is “Accrued Revenue” an asset or liability?
Asset
56
Q: What is an error of omission?
A: A transaction not recorded at all.
56
Is “Bad Debts Expense” an operating or non-operating expense?
Operating expense.
57
Q: What is a compensating error?
A: Two or more errors that cancel each other out.
58
Q: What is an error of commission?
A: A transaction recorded in the wrong account.
59
Q: What is the suspense account used for?
Q: What is the suspense account used for?
60
Q: If total debits and credits don’t match, what’s the first step?
A: Recheck all arithmetic and postings.
61
Q: What are the main financial statements for a partnership?
A: Income Statement, Statement of Partners’ Capital, Balance Sheet.
62
Q: How are profits divided in a partnership without an agreement?
Equally
63
Q: How are drawings recorded?
A: Debit drawings account, credit cash.
64
Q: What happens when a partner contributes a non-cash asset?
A: Asset is recorded at fair value, and partner’s capital is increased.
65
Q: What happens when a partner retires?
A: Their capital is removed and the remaining partners’ capital is adjusted.
66
Q: What is consolidation?
Q: What is consolidation?
67
Q: What is a subsidiary?
A: A company controlled by another company (the parent).
68
Q: How is intercompany transaction treated in consolidation?
Eliminated
69
Q: What is goodwill in consolidation?
A: Excess of purchase price over the fair value of net assets.
70
Q: How are minority interests presented?
A: As a separate component of equity.
71
Q: What is a finance lease?
Q: What is a finance lease?
72
Q: What is an operating lease?
A: A lease that does not transfer significant ownership risks/rewards.
73
Q: How is a finance lease recorded by the lessee?
A: Recognize asset and liability at the present value of lease payments.
74
Q: How is an operating lease recorded?
A: Lease payments are expensed on a straight-line basis.
75
Q: When is revenue recognized under accrual accounting?
A: When earned, not when cash is received.
76
Q: What are the 5 steps of revenue recognition under IFRS 15?
A: Identify contract, identify obligations, determine price, allocate price, recognize revenue.
77
Q: What is a performance obligation?
A: A promise to deliver a good or service.
78
Q: What is the going concern assumption?
A: The business will continue to operate into the foreseeable future.
79
Q: What is the matching principle?
A: Expenses should be matched to the revenues they help generate.
80
Q: What is the prudence (conservatism) concept?
A: Don't overstate income or assets.
81
Q: What is the consistency principle?
A: Accounting methods should be used consistently across periods.
82
Q: What is materiality?
A: An item is material if its omission or misstatement could influence decisions.
83
Q: What is a classified balance sheet?
A: One that separates current and non-current assets and liabilities.
84
Q: What is treasury stock?
A: A company’s own shares that it has repurchased.
85
Q: What is par value of a share?
A: The nominal value of a share stated in the charter.
86
Q: What is a stock split?
A: An increase in the number of shares outstanding with no change in equity.
87
Q: What is a journal voucher?
A: Documentation supporting a journal entry.
88
Q: What is fair value?
A: The price that would be received to sell an asset in an orderly transaction.
89
Q: What is a provision?
A: A liability of uncertain timing or amount.
90
What is the accrual basis of accounting?
A: Revenues and expenses are recognized when earned or incurred, not when cash is exchanged.
91
What is the cash basis of accounting?
Revenues and expenses are recognized only when cash is received or paid.
92
Q: What is the monetary unit assumption?
A: Only transactions measurable in monetary terms are recorded.
93
Q: What is the going concern assumption?
A: The business will continue operating for the foreseeable future.
94
What is the economic entity assumption?
The business is treated as separate from its owners or other entities.
95
What is the matching principle?
Expenses should be matched to the revenues they help generate in the same period.
95
What is the time period assumption?
Financial reports are prepared for specific periods (e.g., monthly, quarterly, annually).
96
What is the revenue recognition principle?
Revenue is recognized when it is earned and realizable.
97
What is the historical cost principle?
Assets are recorded at their original purchase price.
98
What is the full disclosure principle?
Financial statements must include all relevant information.
99
What is the consistency principle?
The same accounting methods should be applied from period to period.
100
What is the conservatism (prudence) principle?
When in doubt, choose the solution that results in lower assets or income.
101
What is the materiality concept?
Only items that significantly affect financial statements need to be reported.
102
What is the reliability principle?
Information should be based on verifiable and objective evidence.
103
What is the relevance principle?
Financial information must be capable of influencing decision-making.
104
What is the comparability principle?
Users must be able to compare financial information across time and entities.
105
What is the substance over form principle?
Transactions are recorded based on economic reality, not just legal form.
106
What is the neutrality principle?
Financial information must be free from bias.
107
What is the faithful representation principle?
Information must be complete, neutral, and free from error.
108
Is 'Cash' an asset, liability, or equity account?
Asset
109
Is 'Accounts Receivable' an asset or liability?
Asset
110
Is 'Inventory' a current or non-current asset?
Current asset
111
Is 'Equipment' a current or non-current asset?
Non-current asset
112
Is 'Accounts Payable' a current or non-current liability?
Current liability
113
Is 'Notes Payable (due in 2 years)' a current or non-current liability?
Non-current liability
114
Is 'Salaries Payable' a current liability or an expense?
Current liability
115
Is 'Utilities Expense' an asset or an expense?
Expense
116
Is 'Accumulated Depreciation' an asset or contra asset?
Contra asset
117
Is 'Dividends' an equity or contra equity account?
Contra equity
118
Is 'Common Stock' an asset or equity account?
Equity
119
Is 'Service Revenue' a revenue or expense account?
Revenue
120
Is 'Rent Expense' a liability or an expense?
Expense
121
Is 'Prepaid Rent' an asset or liability?
Asset
122
Is 'Unearned Revenue' a liability or revenue?
Liability
