Basic & Intermediate Concepts of Financial Accounting

Question 1

The objective of general-purpose financial reporting is to

Answer 1

Report financial information that is useful in making decisions about providing resources to the reporting entity.

Question 2

The primary users of financial information are

Answer 2

Current or prospective investors and creditors who cannot obtain it directly.

Question 3

Certain assumptions about the environment in which the reporting entity operates are used in the preparation of the financial statements.
What are those assumptions?

Answer 3

1) Going-concern assumption
2) Economic-entity assumptions
3) Monetary-unit assumptions
4) Periodicity assumption

Question 4

It is assumed that the entity will operate indefinitely and will not be liquidated.

Answer 4

Going-concern assumption

Question 5

The reporting entity is separately identified for the purpose of economic and financial accountability. Thus, the economic affairs of owners and managers are kept separate from those of the reporting entity.

Answer 5

Economic-entity assumption

Question 6

Accounting records are kept in terms of money.

Answer 6

Monetary-unity assumption

Question 7

Financial statements are prepared periodically throughout the life of an entity to ensure the timeliness of information.

Answer 7

Periodicity assumption

Question 8

For financial information to be useful in decision making, it must have the following qualitative characteristics:

Answer 8

1) Relevance,
2) Faithful representation,
3) Comparability,
4) Verifiability,
5) Timeliness, and
6) Understandability

Question 9

Provide guidelines for recording financial information.

Answer 9

Accounting principles

Question 10

The accounting principles are:

Answer 10

1) Historical cost principle
2) Full-disclosure principle
3) Revenue recognition principle
4) Matching principle

Question 11

Transactions are recorded initially at cost because that is the most objective determination of fair value.

Answer 11

Historical cost principle

Question 12

Financial statement users should be able to assume that financial information that could influence users’ judgment is reported in the financial statements.

Answer 12

Full-disclosure principle

Question 13

Revenues and gains should be recognized when realized or realizable and earned.

Answer 13

Revenue recognition principle

Question 14

Expenses should be recognized in the same period as directly related revenues.

Answer 14

Matching principle

Question 15

Are the primary of communicating financial information to external parties.

Answer 15

Financial statements

Question 16

A full set of financial statements includes:

Answer 16

1) Statement of financial position,
2) Income statement,
3) Statement of comprehensive income,
4) Statement of changes in equity,
5) Statement of cash flows.

Question 17

Reports the amounts in the accounting equation at a moment in time, such as at the end of fiscal year. The basic accounting states the following:
Assets = Liabilities + Equity

Answer 17

The statement of financial position, also called the balance sheet

Question 18

Reports the results of an entity’s operations over a period of time, such as a year.
Income (loss) = Revenue + Gains - Expenses - Losses

Answer 18

The income statement

Question 19

Revenue ordinarily is recognized upon the

Answer 19

Delivery of goods or services when the earning process is completed.

Question 20

If one exists, is presented net of tax in separate section of the income statement after income from continuing operations.

Answer 20

Discontinued operation

Question 21

Consists of

1) Net income or loss and
2) Other comprehensive income (OCI)

Answer 21

Statement of comprehensive income

Question 22

Reconciles the beginning balance for each component of equity to the ending balance

Answer 22

Statement of changes in equity

Question 23

The primary purpose of the statement of cash flows is to

Answer 23

Provide relevant information about the cash receipts and cash payments of an entity during the period.

Question 24

Statement of cash flows provides information about cash inflows and outflows from:

Answer 24

1) The operating,
2) Investing, and
3) Financing activities of the entity.

Question 25

Financial statements are prepared under the

Answer 25

Accrual basis of accounting

Question 26

Records the financial effects of transactions and other events and circumstances when they occur rather than when their associated cash is paid or received.

Answer 26

Accrual accounting records

Question 27

Is the accrual-accounting process of distributing an amount according to a plan or formula.

Answer 27

Allocation

Question 28

Assigning a total cost to the accounting periods expected to be benefited is a

Answer 28

Common allocation

Question 29

An accounting system consists of:

Answer 29

1) A set of accounts, 2) Recorded in a journal and 3) Posted to a ledger

Question 30

It records the effects of the transactions and other events and circumstances that must be recognized by the entity.

Answer 30

An accounting system

Question 31

The accounting system:

Answer 31

1) Classifies the items, 2) Summarizes their effects, and 3) Reports the results in the form of financial statements.

Question 32

The accounting system is based on the:

Answer 32

1) Debit-credit and | 2) Double-entry convention

Question 33

In accordance with the convention,

Answer 33

1) A debit is an increase (decrease) in a given account, and | 2) A credit is a decrease (increase) in the same account.

Question 34

Record the financial effects of transactions, events, and other circumstances in the accounting system.

Answer 34

Journal entries

Question 35

Is a schedule comparing the cash balance per books with the balance per bank statement (usually received monthly).

Answer 35

Bank reconciliation

Question 36

Items know to the entity but not to the bank are:

Answer 36

1) Outstanding checks, 2) Deposits in transit, and 3) Errors made by the bank

Question 37

Items known to the bank but not to the entity are:

Answer 37

1) Amounts added (collections and interest) or | 2) Subtracted (or not added) by the bank (insufficient funds checks and service charges).

Question 38

Accounts receivable are reported at:

Answer 38

Net Realizable Value (NRV)

Question 39

NPV of accounts receivable equals

Answer 39

Gross accounts - allowance for uncollectible accounts.

Question 40

The two common methods of measuring bad debt expense and the allowance for uncollectible accounts are:

Answer 40

1) The percentage-of-sales method and | 2) The percentage-of-receivables method

Question 41

The cost of inventory includes:

Answer 41

1) The purchase price (net of allowances and returns), 2) Shipping charges, and 3) Any other costs necessary to bring the inventory to a location and condition ready for use.

Question 42

Tracks every item purchased and sold. This system is generally more suitable for entities that sell relatively expensive and heterogeneous items and require continuous monitoring of inventory and cost of goods sold accounts.

Answer 42

Perpetual inventory system

Question 43

In the periodic inventory system,

Answer 43

Inventory and cost of goods sold are updated at specific intervals, such as quarterly or annually, based on the results of a physical count.

Question 44

Requires determining which specific items are sold and thus reflects the actual physical flow of goods.

Answer 44

Specific identification method

Question 45

When the inventory items purchased/produced are identical and ordinarily interchangeable, the use of:

Answer 45

1) Average method, 2) FIFO, or 3) LIFO is more appropriate.

Question 46

Consists of tangible property expected to benefit the entity for more than 1 year that is held for the production or supply of goods or services, rental to others, or administrative purposes

Answer 46

Property, plant, and equipment (PPE), also called fixed assets

Question 47

Includes the net purchase price and the directly attributable costs of bringing the asset to the location and condition needed for its intended operation.

Answer 47

Historical/initial cost of PPE

Question 48

Is the process of systematically and rationally allocating the depreciable base of a tangible capital asset over its expected useful life.

Answer 48

Depreciation

Question 49

The periodic depreciation expense is recognized in:

Answer 49

The income statement

Question 50

Depreciation methods include:

Answer 50

1) Straight-line depreciation 2) Units-of-production method, and 3) Accelerated depreciation methods, such as declining balance and sum-of-the-years'-digits methods

Question 51

Allocates the depreciable base evenly over the estimated useful life of the asset.

Answer 51

Straight-line depreciation

Question 52

Straight-line depreciation

Answer 52

Depreciation expense = Depreciable base divided by Estimated useful life

Question 53

Allocates a proportional amount of the asset's cost based on its level of output.

Answer 53

Units-of-production method

Question 54

Units-of-production Method

Answer 54

Depreciation expense = Depreciable base x (Units produced during current period divided by Estimated total lifetime units)

Question 55

Result in decreasing depreciation charges over the life of the assets.

Answer 55

Accelerated depreciation methods

Question 56

Is an identifiable, nonmonetary asset that lacks physical substance.

Answer 56

Intangible asset

Question 57

An intangible asset with finite useful life is

Answer 57

Amortized.

Question 58

An intangible asset with an indefinite useful life is

Answer 58

Not amortized but tested for impairment at least annually.

Question 59

Is the value today of some future payment.

Answer 59

Present value (PV) of an amount

Question 60

Present value (PV) equals

Answer 60

The future payment x the present value of 1 (a factor found in a standard table) for the given number of periods and interest rate.

Question 61

Is a series of equal payments at equal intervals of time.

Answer 61

An annuity

Question 62

Is a series of payments occurring at the end of each period.

Answer 62

An ordinary annuity (annuity of arrears)

Question 63

Is a series of payments occurring at the beginning of each period.

Answer 63

An annuity due (annuity in advance)

Question 64

Is the amount available at a specified time in the future based on a single investment (deposit) today.

Answer 64

Future value (FV) of an amount

Question 65

Is a formal contract to pay an amount of money (face amount) at the maturity date plus interest at the stated rate at specific intervals.

Answer 65

A bond

Question 66

The proceeds received from the investors on the day the bonds are sold equals

Answer 66

The present value of the sum of the future cash flows expected to be received from the bonds.

Question 67

Bond premium or discount must be amortized over the life of the bonds using the

Answer 67

Effective-interest method

Question 68

Effective-interest method equals

Answer 68

Carrying amount of the bond at the beginning of the period x Effective interest rate