Accounting Basics

Question 1

This listing of the general ledger accounts does not include the account balances or other amounts.

Answer 1

Chart of Accounts

Question 2

Define:
“SG&A
(or)
selling, general and administrative”

Answer 2

These are a company’s operating expenses other than the cost of goods sold. They are also period costs (as opposed to product costs).

Question 3

This asset is part of property, plant and equipment but it is not depreciated.

Answer 3

land

Question 4

These are an integral part of the financial statements and are required by the full disclosure principle. They include the company’s significant accounting policies.

Answer 4

notes to the financial statements

Question 5

Define:
“the accrual method of accounting
(or)
accrual basis of accounting”

Answer 5

This method reports revenues when they are earned (as opposed to when the cash is received) and reports expenses when they occur (as opposed to when they are paid).

Question 6

Define: “Depreciation”

Answer 6

This is the allocation of a plant asset’s cost to expense over the asset’s useful life. The purpose is to match the asset’s cost to the years that benefit from its use.

Question 7

Define:
“cash flow statement
(or)
statement of cash flows”

Answer 7

This financial statement reports the major changes in a corporation’s cash and cash equivalents. Amounts are grouped according to operating, investing, and financing activities.

Question 8

Define:
“stockholders’ equity
(or)
shareholders’ equity”

Answer 8

The total amount for this section of a corporation’s balance sheet is the amount of assets minus liabilities. It reports the corporation’s paid-in capital, retained earnings, and any deduction for treasury stock. It is also the total amount of the corporation’s book value.

Question 9

Define: “Credit”

Answer 9

This term indicates the right side of a general ledger account. It is also the normal balance for liability, stockholders’ equity, revenue, and gain accounts.

Question 10

Define:
“cost principle
(or)
historical cost principle”

Answer 10

This basic underlying principle requires a transaction to be recorded at its cash value at the time of the transaction. It also prevents reporting the increases in the market value of property.

Question 11

Define: “current assets”

Answer 11

This is defined as a company’s cash and other resources that are expected to turn to cash within one year of the balance sheet date (or within the operating cycle if the operating cycle is longer than one year).

Question 12

Define: “liabilities”

Answer 12

These are the obligations of a company and are one of the main elements of the balance sheet and accounting equation. Deferred revenues are one of these.

Question 13

Define: “Expenses”

Answer 13

Under the accrual method, these costs are reported on the income statement when they have been used up in the process of earning revenues.

Question 14

Define: “Debit”

Answer 14

This term indicates the left side of a general ledger account. It is also the normal balance for asset, expense, and loss accounts.

Question 15

Define: “assets”

Answer 15

These are a company’s resources that have future economic value which can be measured in the company’s currency. Prepaid expenses are one of these.

Question 16

Define:
"income statement
(or)
statement of earnings
(or)
statement of operations"

Answer 16

This financial statement reports a corporation’s profitability for a specified period of time. It reports revenues, expenses, gains, losses, and the resulting net income. Also referred to as the P&L.

Question 17

Define:
“gross profit
(or)
gross margin”

Answer 17

“This is the remainder after subtracting the cost of goods sold from net sales.”

Question 18

This basic underlying accounting principle requires that some expenses and liabilities be accrued or deferred.

Answer 18

matching principle

Question 19

Define:
“book value
(or)
carrying value”

Answer 19

This amount is an asset’s cost minus its accumulated depreciation. It is also the face value of bonds minus its unamortized discount (or plus its unamortized premium). It is also the amount of a corporation’s stockholders’ equity.

Question 20

Define:
“earnings per share
(or)
EPS”

Answer 20

This amount is required to appear on the income statement of a publicly traded corporation. It uses the weighted average number of shares of common stock outstanding.

Question 21

Define:
“cash method of accounting
(or)
cash basis of accounting”

Answer 21

This method reports revenues when cash is received (as opposed to when the revenues are earned) and reports expenses when they are paid (as opposed to when they occur).

Question 22

Define:
“balance sheet
(or)
statement of financial position”

Answer 22

This financial statement reports a company’s financial position as of a moment of time. It reports the assets, liabilities and stockholders’ (or owner’s) equity.

Question 23

Define: “revenues”

Answer 23

Under the accrual method, these are reported on the income statement when they are earned. Sales and fees earned are examples.

Question 24

Define:
“accounting equation
(or)
bookkeeping equation”

Answer 24

This algebraic expression is assets = liabilities + owner’s (or stockholders’) equity. It should remain in balance under the double-entry system.

Question 25

Define: "double-entry accounting (or) double-entry bookkeeping"

Answer 25

Under this system every transaction will result in an amount recorded in at least two general ledger accounts. It also requires that the amounts recorded as debits must be equal to the amounts recorded as credits.

Question 26

Define: "inventory"

Answer 26

This current asset is the cost of a merchant's or manufacturer's goods held for sale.