LU2

Question 1

What is the fundamental purpose of accounting?

Answer 1

to provide accurate, useful, and timely financial information in the form of financial statements, forecasts, budgets and many types of reports

Question 2

What is bookkeeping?

Answer 2

the initial phase of accounting; the primary function is to record business transactions in the accounting records

Question 3

Why are financial statements necessary?

Answer 3

• Managers need timely and accurate information to make intelligent decisions if their businesses are to succeed
• Investors need financial statements to analyze the quality of a potential investment or current stock holding
• Banks need financial statements to identify any risk involved doing business with customers on an open line of credit

Question 4

Who are the users of financial statements?

Answer 4

• External users are those outside of the business, such as investors, banks, and suppliers
• Internal users are the management of the company, such as the board of directors, the president and other officers, and the managers of the business

Question 5

What is financial accounting?

Answer 5

it is primarily concerned with recording and accumulating accounting information to be used in the preparation of financial statements for external users. Involves the basic accounting processes of recording, classifying, and summarizing business transactions

Question 6

What is managerial accounting?

Answer 6

it has to do with recording and accumulating information to prepare financial statements and reports for internal users. it provides performance reports that compare the results of the operations with the budget plans.

Question 7

What is a business transaction?

Answer 7

the exchange of merchandise, property, or services for cash or promise to pay

Question 8

What is a double-entry system?

Answer 8

it is a business transaction that creates events that affect two or more bookkeeping accounts in the accounting records

Question 9

What are the FIVE classifications in accounting systems?

Answer 9

• Assets = cash, possessions, and purchased rights
• Liabilities = the debts of the business; claims on assets by outsiders
• (Owner’s) Equity = the owner’s financial interest in the business; claims on assets by owners
• Revenue
• Expenses

Question 10

What is the accounting equation?

Answer 10

Assets = Liabilities + Equity

Question 11

Name types of financial statements

Answer 11

• Balance Sheet (the statement of financial position)
• Income Statement (the statement of operations)
• The Equity Statement (reflect changes in equity that occurred during an accounting period )
• The Statement of Cash Flows
• The Statement of Retained Earnings (Its purpose is to compute the amount of earnings retained by the corporation. Retained Earnings represents the lifetime profits of the business that have not been declared as dividends to the shareholders)

Question 12

What does GAAP stand for?

Answer 12

Generally Accepted Accounting Principles

Question 13

What is the realisation principle?

Answer 13

states that revenue resulting from business transactions should be recorded only when a sale has been made and earned. For instance, an advance deposit of $500 for a wedding banquet to be held in 2 months cannot be classified as a sale, because it has not been held and “earned”. In this case receiving cash creates a liability account called “unearned revenue”.

Question 14

What is the matching principle?

Answer 14

states that all expenses must be recorded in the same accounting period as the revenue they helped to generate

Question 15

What is the cash accounting method?

Answer 15

records the results of a business transaction only when cash is received or paid out (does not comply with GAAP), used by small businesses

Question 16

What are annual financial statements?

Answer 16

Financial statements issued at the end of a company’s business year (fiscal year

Question 17

What is a fiscal year?

Answer 17

might be a calendar year or a year consisting of 12 consecutive months

Question 18

What is the statement of income?

Answer 18

It shows revenue and expenses and provides information about the results of operations for a stated period of time. Shows a profit or loss for the time period (does not exceed one business year).

Question 19

What is the formula for net income/net profit (loss)

Answer 19

Revenue
Cost of Sales -
---------------------
Gross Profit
Operating Expenses -
-------------------------------
Income before fixed charges and income taxes
Fixed Charges -
-------------------------------------
Income before income taxes
Income taxes -
------------------------------------
Net Income (loss)

Question 20

Examples of operating expenses:

Answer 20

• Salaries and wages
• Employee benefits
• China, Glassware, and Silverware
• Kitchen fuel
• Laundry
• Operating Supplies
• Advertising
• Utilities
• Repairs

Question 21

Examples of fixed charges:

Answer 21

• Rent
• Property taxes
• Property insurance
• Interest expense
• Depreciation

Question 22

What are income taxes?

Answer 22

Federal and other government income taxes

Question 23

What are retained earnings?

Answer 23

Retained Earnings represents the lifetime profits of the business that have not been declared as dividends to the shareholders

Question 24

What is on the balance sheet?

Answer 24

assets, liabilities, and equity, revealing the financial position of a business

Question 25

What are assets?

Answer 25

cash, receivables, inventories, equipment, property and rights acquired by the business either by purchase or stockholder investment. Assets are items that are not used up at present – they have future utility or value

Question 26

What are liabilities?

Answer 26

the debts of the business. Claims on assets by outsiders

Question 27

What is equity?

Answer 27

represents the owner’s financial interest in the business. Also represent the residual claim on the assets by the owners

Question 28

What are current assets? (Examples)

Answer 28

• Cash = cash in house banks, cash in checking and savings accounts, and certificates of deposit.
• Accounts Receivable = all amounts due from customers on open accounts
• Inventories = merchandise held for resale, such as food provisions and liquor stock. Also operating supplies such as guest, office and cleaning supplies.
• Prepaid expenses = the value of prepayments whose benefits will expire within 12 months of the balance sheet date. Include items such as prepaid interest, rent, taxes and licenses

Question 29

What are non-current assets?

Answer 29

long-term investments where the full value will not be realized within the accounting year. For instance, land, property and equipment

Question 30

What are “other assets”?

Answer 30

security deposits, preopening expenses, goodwill, security deposits

Question 31

What are current liabilities?

Answer 31

• Accounts payable – total of unpaid invoices due to creditors
• Sales/income tax payable – all sales tax collected from customers that are payable to federal or local government agencies
• Accrued expenses – the total amount of expenses incurred for the period up to the balance sheet date but that are not payable until after the balance sheet date
• Current portion of Long-term debt - includes the principal portion of long-term debt that is due within one year of the balance sheet date.

Question 32

What are long-term liabilities?

Answer 32

any debt not due within 12 months of the balance sheet date

Question 33

What belongs to equity?

Answer 33

• Common Stock = par value, number of shares authorized, and the number of shares issued.
• Additional paid-in capital = the total amount for cash, property, and other capital contributed by stockholders in excess of the par value of the common stock.
• Retained Earnings = portion of net income earned by the corporation that is not distributed as dividends but retained in the business.
- Withdrawals
- Treasury stock