Financial Accounting Terms Exam Questions with Complete Solutions
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Course
Financial Accounting
Institution
Financial Accounting
Accounting Equation - Answer-Assets=Liabilities+ Owners' Equity
Equality of Assets= Claims of Creditors+ Claims of Owners
Reason why we call it a "Balance" Sheet.
Always equal because they represent two views of the same business.
Everything a business owns has been supplied to it either by t...
Financial Accounting Terms Exam
Questions with Complete Solutions
Accounting Equation - Answer-Assets=Liabilities+ Owners' Equity
Equality of Assets= Claims of Creditors+ Claims of Owners
Reason why we call it a "Balance" Sheet.
Always equal because they represent two views of the same business.
Everything a business owns has been supplied to it either by the creditors or the owners
Accrual Accounting - Answer-Calls for recording revenue in the period in which it is
earned and recording expenses in which they are incurred. The effect of events on the
business is recognized as services are rendered or consumed rather than cash is
received or paid.
The policy of recognizing in the accounting records when it is earned and recognizing
expenses when the related goods or services are used.
The purpose for this is to measure the profitability of economic activities conducted
during the accounting period.
Matching Principle-most important concept, Revenue is offset with all of the expenses
incurred in generating that revenue, measuring overall profitability of the economic
activity.
Alternate is Cash Basis Accounting
Adjusted Trial Balance - Answer-A schedule indicating the balances in ledger accounts
after end-of-period adjusting entries have been posted. The amounts shown in this are
carried directly into financial statements.
Step 5 of Accounting Cycle; comes after end-of-period adjustments
Adjusting Entry - Answer- Example: Shop purchases supplies that will be used for
several months. You need this to record the expense associated with the shop supplies
used each month.
Example 2: Two or Three year magazine subscriptions
, Needed at the end of each accounting period to make certain that appropriate amounts
of revenue and expense are reported in the company's income statement.
Four Types of Adjusting Entries (pg. 142)
1)Converting Assets to Expenses
2)Converting Liabilities to Revenue
3)Accruing Unpaid Expenses
4)Accruing Uncollected Revenue
These entries assign revenues to the period in which they are earned, and expenses to
the periods in which related goods or services are used.
Certain transactions affect the revenue or expenses of two or more accounting periods.
The purpose of adjusting entires is to assign to each accounting period appropriate
amounts of revenue and expense.
Balance Sheet - Answer-The financial statement showing the financial position of an
enterprise by summarizing its assets, liabilities, and owners' equity at a point in time or
specific date. Sometimes described as a snapshot of the business in financial or dollar
terms. Also called the statement of financial position.
Business Transactions - Answer-An economic event that initiates the accounting
process of recording it in a company's accounting system. They are the interactions
between businesses and their customers, vendors and others with whom they do
business.
Consistency - Answer-Example: Choosing FIFO or LIFO.
Example: Choosing Accelerated Method for ALL Vehicles and Equipment.
(in inventory valuation) Basic concept underlying reliable financial statements that calls
for the use of the same method of inventory pricing from year to year, with full
disclosure of the effects of any change in method. Intended to make financial
statements comparable.
(in Depreciation) The company does not change from year to year the method used in
computing the depreciation expense for a given plant asset. Choosing Straight-Line or
Accelerated Method.
Cost Principle - Answer-Example: Business buys land for $100,000. Entered in
accounting as asset of $100,000. In 10 years if market value rises to $250,000, amount
on balance sheet is still $100,000.
The widely used principle of accounting for assets at their original cost to the current
owner. Whatever the asset was originally purchased for (historical cost), is what is on
the balance sheet, no matter the current market value.
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