Financial Accounting 1-3

Question 1

What is the Accounting Equation?

Answer 1

Assets = Liabilities + Owners Equity

The Accounting Equation is fundamental to understanding accounting principles.

Question 2

What happens to the accounting equation when transactions occur?

Answer 2

It must always balance, reflecting increases or decreases in assets, liabilities, and/or owners’ equity.

Question 3

Define a transaction in accounting.

Answer 3

An event that occurs during the course of starting or running a business.

Question 4

Give examples of transactions.

Answer 4

• Making an equity investment
• Taking a loan
• Purchasing inventory
• Selling goods
• Performing services
• Ordering office supplies

Question 5

What accounting method do most companies use?

Answer 5

Accrual method of accounting.

Question 6

What does the accrual method of accounting entail?

Answer 6

Transactions are recorded in the period they relate to, regardless of cash exchange timing.

Question 7

List some guiding principles of accounting.

Answer 7

• Conservatism
• Relevance vs. reliability
• Historical cost
• Consistency
• Materiality
• Entity concept
• Money measurement
• Going concern

Question 8

Define assets in accounting.

Answer 8

Resources owned or controlled by an entity that will produce benefits in the future.

Question 9

What are liabilities?

Answer 9

Obligations to pay a third party for resources provided to an entity.

Question 10

What constitutes owners’ equity?

Answer 10

Funds contributed by owners as well as profits generated by the business.

Question 11

Define revenue in accounting.

Answer 11

The money that a business receives from providing goods or services to a customer.

Question 12

What are expenses?

Answer 12

The costs associated with providing goods or services to a customer.

Question 13

Fill in the blank: Assets are resources owned or controlled by an entity that will produce _______.

Answer 13

[benefits in the future]

Question 14

True or False: The accounting equation can become unbalanced.

Answer 14

False

Question 15

What are the smaller groupings called that businesses use to record transactions?

Answer 15

Accounts

Examples of accounts include cash, accounts receivable, inventory, and fixed assets.

Question 16

What accounting method is used for recording transactions?

Answer 16

Double entry accounting

This method uses debits on the left and credits on the right.

Question 17

In double entry accounting, what do debits and credits represent?

Answer 17

Increases or decreases

The meaning of debits and credits depends on the account being debited or credited.

Question 18

Which accounts increase with a debit and decrease with a credit?

Answer 18

Assets and expenses

Conversely, liabilities, equity, and revenue increase with a credit and decrease with a debit.

Question 19

Fill in the blank: Assets and expenses increase with a ______ and decrease with a credit.

Answer 19

Debit

Question 20

Fill in the blank: Liabilities, equity, and revenue increase with a ______ and decrease with a debit.

Answer 20

Credit

Question 21

What is the first step in the recording process?

Answer 21

Identify transaction

Question 22

What is the second step in the recording process?

Answer 22

Understand transaction

Question 23

What is the third step in the recording process?

Answer 23

Create journal entry

Question 24

What is created after posting to T-Accounts?

Answer 24

Trial balance

Question 25

What do businesses create after preparing the trial balance?

Answer 25

Financial statements

Question 26

What are the two types of accounts found in the trial balance?

Answer 26

Real accounts and nominal accounts ## Footnote Real accounts reflect cumulative balances and appear on the balance sheet, while nominal accounts represent activity over a period and appear on the income statement.

Question 27

What types of accounts are classified as real accounts?

Answer 27

Assets, liabilities, and equity accounts ## Footnote Real accounts appear on the balance sheet.

Question 28

What types of accounts are classified as nominal accounts?

Answer 28

Revenues and expenses ## Footnote Nominal accounts appear on the income statement.

Question 29

What happens to the balances of nominal accounts at the end of each accounting period?

Answer 29

They are transferred to retained earnings ## Footnote This allows nominal accounts to start back at zero for each new accounting period.

Question 30

What does the balance sheet show?

Answer 30

A company's financial position as of a specific date ## Footnote It provides a snapshot of the business at a specific point in time.

Question 31

Under US GAAP, in what order are accounts presented on the balance sheet?

Answer 31

Current assets, non-current assets, current liabilities, non-current liabilities, and owners' equity ## Footnote Items within each group are presented in order of liquidity.

Question 32

Under IFRS, how are accounts typically presented on the balance sheet?

Answer 32

Non-current assets, current assets, owners' equity, non-current liabilities, and current liabilities ## Footnote This order presents the least liquid items first.

Question 33

What does the income statement show?

Answer 33

A company's financial performance over a period of time ## Footnote It includes all revenue and expense accounts for a specified duration.

Question 34

What is gross profit?

Answer 34

Sales less cost of goods sold ## Footnote It is one of the measures of income shown on the income statement.

Question 35

What is operating income?

Answer 35

Gross profit less operating expenses. Also known as EBIT. ## Footnote It is another measure of income that reflects the company's profit from operations.

Question 36

What is the formula for net income?

Answer 36

Income before taxes less taxes ## Footnote Net income is the final measure of profit shown on the income statement.

Question 37

What two important financial statements are discussed in the module?

Answer 37

Balance sheet and income statement ## Footnote These statements show the company's financial position and performance, respectively.

Question 38

What is the significance of the statement of cash flows?

Answer 38

It is the third and final financial statement ## Footnote Further details will be covered in Module 5.

Question 39

Fill in the blank: The balance sheet shows all of the ______, liabilities, and owners' equity accounts as of a specific date.

Answer 39

asset accounts

Question 40

True or False: The income statement can only show net income.

Answer 40

False ## Footnote The income statement can show various measures of income, including gross profit and operating income.

Question 41

How do you calculate Operating Income?

Answer 41

Gross profit (net sales - COGS) - operating expenses. You do NOT subtract interest or tax expenses

Question 42

What is another term for EBIT?

Answer 42

Operating Income

Question 43

What is Net Income

Answer 43

Total Revenue - (Expenses + Taxes)

Question 44

Name ways to calculate Operating Income

Answer 44

Question 45

How is depreciation classed on the income statement?

Answer 45

As an operating expense