Accounting

Question 1

What are the four main financial statements?

Answer 1

Income Statement, Statement of Financial Position, Statement of Changes in Equity, Statement of Cash Flows.

Question 2

What is the purpose of the Income Statement?

Answer 2

To show the company’s revenues, expenses, and profit or loss for the year.

Question 3

What does the Statement of Financial Position show?

Answer 3

The financial health of a business at a specific date, listing assets, liabilities, and equity.

Question 4

What is the accounting equation?

Answer 4

Assets = Liabilities + Equity.

Question 5

What is the purpose of the Statement of Cash Flows?

Answer 5

It shows cash inflows and outflows from operating, investing, and financing activities.

Question 6

What is the Trial Balance?

Answer 6

A list of all double-entry transactions ensuring total debits equal total credits.

Question 7

What is the purpose of financial statements?

Answer 7

To evaluate financial performance, assist in decision-making, and provide transparency to stakeholders.

Question 8

Who are internal users of financial information?

Answer 8

Owners, managers, employees.

Question 9

Who are external users of financial information?

Answer 9

Investors, lenders, suppliers, customers, tax authorities, the public.

Question 10

Why do investors use financial information?

Answer 10

To assess profitability and potential return on investment.

Question 11

How do lenders use financial statements?

Answer 11

To determine the company’s ability to repay loans.

Question 12

Why do suppliers use financial information?

Answer 12

To evaluate the company’s creditworthiness before extending credit.

Question 13

What are the key elements of an Income Statement?

Answer 13

Revenue, Cost of Sales, Expenses, Profit/Loss.

Question 14

What is Revenue?

Answer 14

The total income earned from sales and services before expenses.

Question 15

What is Cost of Sales (COS)?

Answer 15

The direct costs associated with producing goods or services.

Question 16

How is Gross Profit calculated?

Answer 16

Revenue - Cost of Sales.

Question 17

How is Net Profit calculated?

Answer 17

Gross Profit - Expenses.

Question 18

Why is the Income Statement important to business owners?

Answer 18

It helps evaluate performance, profitability, and future projections.

Question 19

What are the three main components of a Statement of Financial Position?

Answer 19

Assets, Liabilities, Equity.

Question 20

What are Non-Current Assets?

Answer 20

Long-term assets used in business operations (e.g., buildings, vehicles).

Question 21

What are Current Assets?

Answer 21

Short-term assets expected to be converted into cash within a year (e.g., inventory, receivables).

Question 22

What are Non-Current Liabilities?

Answer 22

Long-term obligations due beyond one year (e.g., loans, bonds payable).

Question 23

What are Current Liabilities?

Answer 23

Short-term obligations due within one year (e.g., trade payables, bank overdrafts).

Question 24

What is Equity?

Answer 24

The owner’s residual interest in the business after liabilities are deducted from assets.

Question 25

How is Equity calculated?

Answer 25

Equity = Total Assets - Total Liabilities.

Question 26

What is the purpose of a Statement of Financial Position?

Answer 26

To provide a snapshot of the company’s financial condition at a specific date.

Question 27

Why do potential investors analyze the Statement of Financial Position?

Answer 27

To assess financial stability and potential investment risks.

Question 28

What are debit balances typically associated with?

Answer 28

Expenses and Assets.

Question 29

What are credit balances typically associated with?

Answer 29

Income, Liabilities, and Equity.

Question 30

How does an increase in assets affect the accounting equation?

Answer 30

It increases total assets, which must be balanced by an increase in liabilities or equity.

Question 31

Why must the Trial Balance be balanced?

Answer 31

To ensure that total debits equal total credits, verifying the accuracy of transactions.

Question 32

What are trade receivables?

Answer 32

Customers who owe the business money for goods or services received on credit.

Question 33

What is an irrecoverable debt?

Answer 33

A debt that cannot be collected from a customer, often due to bankruptcy.

Question 34

How does an irrecoverable debt affect the accounts?

Answer 34

It reduces trade receivables and increases expenses.

Question 35

Why are financial ratios important?

Answer 35

They help analyze a company's performance and compare it with industry benchmarks.

Question 36

What is the Current Ratio formula?

Answer 36

Current Assets / Current Liabilities.

Question 37

What does the Current Ratio indicate?

Answer 37

The company's ability to pay short-term obligations.

Question 38

What is the Debt-to-Equity Ratio formula?

Answer 38

Total Liabilities / Equity.

Question 39

What does the Debt-to-Equity Ratio show?

Answer 39

The proportion of debt financing relative to equity.

Question 40

Why is the Statement of Financial Position legally required for limited companies?

Answer 40

To ensure financial transparency and accountability.

Question 41

What regulatory bodies oversee financial reporting?

Answer 41

International Financial Reporting Standards (IFRS), Generally Accepted Accounting Principles (GAAP).

Question 42

What is depreciation?

Answer 42

The gradual reduction in the value of an asset over time.

Question 43

How does depreciation affect financial statements?

Answer 43

It reduces asset value and increases expenses.

Question 44

What is goodwill?

Answer 44

An intangible asset representing a company's reputation and brand value.

Question 45

What are prepayments?

Answer 45

Expenses paid in advance for future periods (e.g., rent, insurance).

Question 46

What are accrued expenses?

Answer 46

Expenses incurred but not yet paid.

Question 47

What is the difference between cash and accrual accounting?

Answer 47

Cash accounting records transactions when cash is exchanged; accrual accounting records when transactions occur.

Question 48

What is a contingent liability?

Answer 48

A potential liability that depends on the outcome of a future event.

Question 49

Why is financial reporting important?

Answer 49

It provides stakeholders with essential information for decision-making.

Question 50

What is working capital?

Answer 50

Current Assets - Current Liabilities.

Question 51

Why is working capital important?

Answer 51

It measures short-term financial health and operational efficiency.