Accounting Basics

Question 1

3 main financial statements

Answer 1

• Income statement
• Balance sheet
• Stmt of cash flows

Question 2

Income statement

Answer 2

• shows how profitable biz is for rhe time interval
• DOES NOT show cash coming in—-> reports revenues earned duting the period and expenses incurred during rhe period

Question 3

Acceual basis accounting

Answer 3

Revenues recognized when EARNED , not when cash received

Question 4

Cash basis of accounting

Answer 4

Revenues recognized when cash received , expenses recognized when paid

Question 5

Revenue recognition principle

Answer 5

• accounting guidelines requiring revienues to be shpwn on inc stmt in period earned not when cash collected
• part of accrual base accounting

Question 6

Matching principle

Answer 6

• Requires company to match expense w related revenues
• show expenses when inccured, not when paid
• i.e: hire someone to help w december work, pay them in jan, still counted as DECEMBER expenses bc INCURRED in December

Question 7

Interest expense (incl formula)

Answer 7

• interest on borrowed money
• if paid as lump sum,need to breakdown
• formula: loan amt x % / 12 = monthly interest expense
  INCOME STMT shows 1 mth of interest every month

Question 8

Balance sheet

Answer 8

• reports amount of assets, liabilities, equity at specific point in time
• assets not reported at their worth (FMV) :
  *long term assets : i.e bldgs, equipment, etc… - reported at cost - amounts already sent to I/S AS deprecistion exp
• so fmv may have increased, but amount on b.s consistently reduced (as its moved ro depreciation expense)

Question 9

Assets

Answer 9

• Things company owns (resources)
• i.e: vehicle, cash in bank, accounts receivable, prepaid expenses

Question 10

Accounts receivable

Answer 10

Money owed to biz
Asset

Question 11

Prepaids/ prepaid expenses

Answer 11

UNexpired portion of prepaid expenses
- i.e prepaid insurance, the premiums NOT paid yet
- expired amount = insurance expense (on inc stmt

Question 12

Cost principle

Answer 12

Assets recorded @ original cost even if value went up

Even if FMV goes up, will not increase recorded amount on balance sheet

Question 13

Conservatism

Answer 13

• Decreasing valueof asset bc of net realizable value (?)
• Price of item decreased and is less that original cost
• i.e: purchased item for $1, price in store cut by 40%, item now costs 0.60, record lower amount as assets vakues on b.s

Question 14

Depreciation

Answer 14

Allocation of the cost of asset to depreciation expense over its usedul life

NOT a valuation process, juet allocstion

Fornassets whose life not indefinite, wears out (i.e car, bike, etc..)

I.e car, depreciates annually, if car was $20,000 useful for 5 years
20,000/5= $4000 to depreciation expense each year

Question 15

Carrying amount

Answer 15

Book value reported on balance sheet

Cost of item - total depreciation since acquired

Each year, carrying amount reduced by depreciation expense (?)

Question 16

Long teem assets

Answer 16

Reported at COST - depreciation expenses (on I/S)?
Even if asset increasd in market value, still decreases (matching principle)

Note: land not depreciates, appesrs at original cost

Question 17

Liabilities

Answer 17

Obligations of the company
Amounts owed to others as of balance sheet date
I.e a loan, amounts owed for supplies, amounts owed to employees

Question 18

Unearned revenue

Answer 18

Liability
Money received in advance of actually esrning the money (doing the work)

Question 19

Stockholders Equity

Answer 19

• 3rd section of balance sheet
• corporarion= stockholders equity
• sole prop: = owners equity
• amount of equity is difference btwn assets and liabilities
• this is NOT the value of the company

Question 20

Accounts in stockholders equity (RCPPAAI)

Answer 20

Retained earnings
Common stock
Paid in capital in excess
Preferred stock
Accumulated other comprehensive income

Question 21

Retained earnings (?)

Question 22

Revenues

Answer 22

Recorded when EARNED, not when cach received

Once received: decrease A/R AND SALES

Question 23

Expenses

Answer 23

Show expenses when INCURRED
NOT WHEN PAID

Question 24

Interest expense formula

Answer 24

Loan amount x %
/ 12
= monthly interest expense (on balance sheet)

Question 25

Depreciation: LAND

Answer 25

Land is not depreciated

Will always appewr at original cost even if worth more