ACG 5026 Practice Exam Questions and Correct Answers
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Course
ACG 5026
Institution
ACG 5026
Discuss the general uses of accounting and who uses it -The process of recording, summarizing and analyzing financial transactions. -Financial is mainly for decision makers outside the company(GAAP, Historic, summarized) -Managerial is mainly for decision makers within the company (no GAAP, Future,...
ACG 5026 Practice Exam Questions and
Correct Answers
Discuss the general uses of accounting and who uses it ✅-The process of recording,
summarizing and analyzing financial transactions.
-Financial is mainly for decision makers outside the company(GAAP, Historic,
summarized)
-Managerial is mainly for decision makers within the company (no GAAP, Future,
detailed)
Discuss the advantages and disadvantages of the corporate entity form ✅Is a legal
entity. A Large number of owners or shareholders are not involved in managing day-to-
day operations.
-Advantages- limited liability, ability to raise capital, ability to separate ownership from
management, ease of transfer ability of ownership.
-Disadvantages- double taxation (corporate profits and dividends/capital gains,
Company pays profits and shareholders pay on shares of their return) paperwork and
formalities
Relate the 3 basic business activities to the financial statements ✅-Operating is
revenues and expenses, is reflected on the income statement and statement of cash
flows. (Products and services)
-Investing includes acquiring and disposing of assets, is reflected on the balance sheet
and statement of cash flows.
-Financing- ask where did the money come from? Debt financing (creditor) and Equity
financing (owners) and is reflected on the balance sheet, statement of cash flows and
statement of stockholders equity.
Describe the institutions that regulate financial accounting and their role in establishing
Generally Accepted Accounting Principles (GAAP) ✅-Security and Exchange
Commission (SEC)
*regulates the issuance and trading of securities in the US
*companies with more than $10-million of assets and securities help by more than 500
owners must file annual and other periodic reports
-Financial Accounting Standards Board (FASB)
*currently establishes accounting standards in the US
*developed the conceptual framework to serve as a guide for accounting issues not
covered by standards
Describe what an audit opinion is ✅NOT a guarantee. A report to the board of
directors of the company and to the shareholders of the company by an independent
auditor, express an opinion as to whether the financial statements present fairly the
, financial activities of the company and if they are in accordance with GAAP. Does not
state the statements are "accurate"
Identify the 4 financial statements and their components and discuss how they are
related ✅-Balance sheet lists the company's investments and sources of financing,
uses the accounting equation (assets equal liabilities plus equity). A point in time.
-Income statement reports the results of a company's operating activities (everything
that happens on the income statement. Should be positive. Start up companies are
expected to be negative at first) over a period of time. Uses equation revenues minus
expenses equals net income. Measures performance. Determine if company is
profitable, how did it get profitable, will profits continue.
- Statement of stockholders equity reports changes in equity over a period of time
(contributed capital and retained earnings).
-Statement of cash flows reports net cash flows from operating, investing, and financing
activities over a period of time.
Discuss components of the financial accounting conceptual framework ✅Benefits >
costs: reported accounting info must be cost effective Materiality: info not large enough
to affect one's decision need not comply with GAAP Understandability: should be
presented so reader can understand how relates to decision process.Relevance: have
ability to make a difference in a decision-timeless, predictive value reliability: be
accurate and free of misstatement or bias- representational faithfulness.comparability:
enable users to identify similarities and differences between sets of economic
phenomena Consistency: exhibit conformity from one reporting period to the next with
unchanging policies and procedures.
Explain when an expenditure should be expensed and when it should be capitalized
✅An item is capitalized(account for expenditure as an asset on the balance sheet, may
become an expense of a future period like when inventory becomes cost of goods sold
when sold and equipment gets depreciated) when it is recorded as an asset, rather than
an expense(account for an expenditure as an expense on the income statement). If it
extends the life, or makes it do something different, we are going to capitalize and place
onto the B/S.
(1) Must be owned or controlled by the company
Legal title or unrestricted right to use the asset
(2) Must possess expected future benefits that can be measured
Benefits can be expected as cash receipts or a reduction of liabilities
Define basic financial accounting terms ✅on separate quizlet
Describe cash vs accrual accounting ✅cash- basis accounting recognizes revenues
and expenses only when cash is received or paid. Does not show performance very
well.
-accrual-recognizes revenue when it is earned. Required by GAAP and IFRS, states
that revenues increase in net assets that are earned by delivering goods and services to
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