Accounting 101

Question 1

What does a balance sheet show?

Answer 1

What the company owns, what it owes and what it’s worth.

Question 2

What does an income statement show?

Answer 2

What a company has earned, what is has paid and the resulting profits or losses over a certain period.

Question 3

What does a statement of cash flow show?

Answer 3

How much the company has brought in and how much is paid out.

Question 4

What is included in the ‘assets’ constituent of the balance sheet?

Answer 4

1. Current assets (cash, inventory, accounts receivable).

2. Non-current assets (property, patents etc.). Non-current assets are split into tangible and intangible.

Question 5

What is included in the ‘liabilities’ constituent of the balance sheet?

Answer 5

1. Current liabilities (≤1 year) Accounts Payable.

2. Non-current liabilities (>1 year) Long term debt.

Question 6

What is shareholder equity?

Answer 6

What the company is worth after al liabilities have been paid off.

Question 7

What is shareholder equity worth at the start of a business?

Answer 7

The amount that was initially invested in the business.

Question 8

Where does profit go and what is it referred to?

Answer 8

Profits flow into shareholder equity as retained earnings.

Question 9

What can happen to retained earnings?

Answer 9

They can either be kept on the balance sheet or paid off in the form of dividends.

Question 10

Retained Earnings =

Answer 10

Retained Earnings = Profits - Losses - Dividends

Question 11

Shareholder Equity =

Answer 11

Shareholder Equity = Assets - Liabilities

Question 12

What does issuing shares do to the balance sheet?

Answer 12

Increases current assets.

Question 13

What does a 4 year bank loan do to the balance sheet?

Answer 13

Increases non-current liabilities.

Question 14

What does selling inventory for a profit do to the balance sheet?

Answer 14

Reduces inventory by however much was sold, and increases current assets by profit made.

Question 15

What does paying salaries do to the balance sheet?

Answer 15

Shareholder equity falls by the amount of salaries paid, and reduces current assets by the same amount.

Question 16

What do interest payments do to the balance sheet?

Answer 16

Reduce current assets and shareholder equity by the amount of interest paid.

Question 17

What are accounts receivable?

Answer 17

Amounts owed by customers to the company.

Question 18

What happens when a customer buys a product with credit?

Answer 18

There is an accounts receivable balance because the company has not received the cash yet?

Question 19

What happens when a company buys inventory using credit?

Answer 19

It will receive credit terms (have to pay within 30, 60, 90 days) from the supplier.

Question 20

What happens to the balance sheet when a customer uses credit to purchase goods from a company?

Answer 20

It is recorded as revenue at the moment of sale (recorded in the accounts receivable section).

Question 21

What is revenue?

Answer 21

Income received for selling goods and services.

Question 22

What are direct operating costs?

Answer 22

Costs of goods sold.

Question 23

What are indirect operating costs?

Answer 23

R&D, Administration, Selling, Distribution.

Question 24

What can indirect operating costs also be known as?

Answer 24

Selling General and Administrative Expenses (SGNA).

Question 25

What is operating income also known as?

Answer 25

EBIT

Question 26

What is the cost of debt financing?

Answer 26

Interest and Bank Charges

Question 27

What is net earnings also known as?

Answer 27

Net profit or net income.

Question 28

Where does net income flow into?

Answer 28

Retained earnings.

Question 29

Gross Profit =

Answer 29

Gross Profit = Revenues - Direct Operating Costs

Question 30

Operating Income =

Answer 30

Operating Income = Gross Profit - Direct Operating Costs

Question 31

Net Income =

Answer 31

Net Income = Operating Income - Cost of Debt Finance - Tax

Question 32

What can gross profit be used for?

Answer 32

Covering indirect operating costs

Question 33

If a company purchases 12 months of insurance in the last month of the financial year at a cost of $12,000. How much insurance would be included on the income statement for that financial year?

Answer 33

Only $1,000 would be included in the income statement for that financial year and the remaining $11,000 would be included on the balance sheet.

Question 34

If a company uses $2,000 worth of office supplies in the current year but were not paid for until the following year, how much of this expense would be included in the income statement for the current year?

Answer 34

The company should include the full expense of 2000, as this is the value that was used in the year. But we record the amount owed on the current liability section of the balance sheet which is known as an accrued expense.

Question 35

What is an accrued expense?

Answer 35

They are expenses that have been reflected on the income statement but have not yet been paid for.

Question 36

What are pre-payments?

Answer 36

Upfront payment relating to a future period.

Question 37

what are accrued expenses?

Answer 37

Expenses that have been incurred but not yet paid.

Question 38

What is zero based budgeting?

Answer 38

A budgeting technique which allocates funding based on efficiency and necessity rather than budgeting history. - All expenses have to be justified in order to be included in this budgeting technique.

Question 39

When are zero based budgets used?

Answer 39

In a cost-cutting environment or where financial controls are in place.