Prepare for your Financial Accounting exam with these practice questions and answers. This guide covers the accounting equation, financial statements, GAAP principles, journal entries, and financial analysis.
Q: Accounting
Answer: the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions
Q: Economic entity assumption
Answer: entity’s financial activities are separate from the owners
Q: time period assumption
Answer: accountants assume that economic information can be meaningfully captured and communicated over short periods of time- monthly, quarterly, annually
Q: monetary unit assumption
Answer: records only items that can be expressed in terms of money
Q: going concern assumption
Answer: reasonable to assume the business will continue operating in the near term. (continuity)
Q: Historical Cost Principle
Answer: assets should be recorded at the original verifiable cost- its the price that is ACTUALLY spent
Q: revenue recognition principle
Answer: recognize revenue in the period that it is earned and collection of cash is reasonably assured. Earned=service has been performed and goods have been delivered
Q: expense recognition principles (matching principle)
Answer: expenses should be matched in the period that helped produce the revenues; must be matched in the time period
Q: conservatism
Answer: prudent reaction to uncertainty; offsets managements optimism; not overstating income or assets
Q: relevance
Answer: makes a difference in a decision scenario-feedback/predictive value
Q: faithful representation/reliability
Answer: information can be depended on- complete, neutral, free from error
Q: Enhancing Characteristics
Answer: comparability, verifiability, timeliness, understandability
Q: comparability
Answer: from period to period what they’re doing
Q: verifiability
Answer: verifying from outside auditors
Q: timeliness
Answer: making sure it’s up to date, not 2009 and relevant to 2014
Q: understandability
Answer: financial info can be understood by a person whose intention is to understand it
Q: cost constraint
Answer: benefits>costs
Q: Assets
Answer: resources that will provide a future benefit; ex: cash, accounts receivable, inventory, investments, stocks/bonds, etc
Q: liabilities
Answer: obligations requiring a future sacrifice of a resource
Q: equity
Answer: difference between assets and liabilities- represents share of assets claimed by owners
Q: contributed capital
Answer: resources exchanged for ownership interest
Q: retained earnings
Answer: profits earned and retained in the business
Q: dividends
Answer: portion of profits distributed to the owners
Q: revenues
Answer: increase of assets due to sale of goods/services (gaining resources)
Q: expenses
Answer: decrease in assets due to sale of goods/services (losing resources)
Q: revenue recognition rule
Answer: timing is super important; revenue is recognized when it is EARNED; sale is complete and collection is expected
Q: net income
Answer: revenues-expenses
Q: assets
Answer: liabilities + stockholders’ equity
Q: financial statements order
Answer: 1. income statement2. retained earnings statement3. balance sheet–snapshot a point in time4. statement of cash flows
Q: income statement
Answer: revenues and expenses; success of operations over period of time
Q: retained earning statement
Answer: net income/net loss; dividends paid and net income for period; changes in R/E balance
Q: balance sheet
Answer: assets=liabilities + stockholders’ equity
Q: statement of cash flows
Answer: cash effects of operations, investing & financing activities; reconciles beginning cash with ending cash
Q: 3 Kinds of Business Activities
Answer: financing activities, investing activities, and operating activities
Q: financing activities
Answer: borrow/acquire funds; bank loan, debt securities, good on credit from suppliers, ownership contributions
Q: investing activities
Answer: asset/resource acquisition
Q: operating activities
Answer: revenue from sales/services; expenses associated with earning revenue