Financial Accounting Exam Questions And Correct Answers
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Course
Financial Accounting
Institution
Financial Accounting
Financial Accounting Exam Questions And
Correct Answers
Owners vs. Managers - answer-The owners of a company can be millions.
-They are not in the company on a daily basis
-The managers run the company
-Risk: *info asymmetry* the managers know more about the company than its owners which
make...
Financial Accounting Exam Questions And
Correct Answers
Owners vs. Managers - answer✔✔-The owners of a company can be millions.
-They are not in the company on a daily basis
-The managers run the company
-Risk: *info asymmetry* the managers know more about the company than its owners which
makes it dangerous for the managers to take the company's money and run
Financial reporting - answer✔✔The communication of an entity's financial information to its
external users
Who uses financial statements? - answer✔✔1. Investors: to check if it is beneficial to invest in
the company
2. Lenders: to check if the company can give them back the money they lend to it
3. Suppliers: to check if the company can pay them for supplying it with goods/services
4. Employees: to check the current financial situation of the company torequest raise in salary or
to ensure that they will keep their job an dthe company is not going to shut down
5. Customers: to check that the company is going to continue its operations so that it can cover
their needs
6. Government: to impose taxes
Which are the most useful financial statements? - answer✔✔1. St. of financial position - what
the company owns and how it is funded
2. St of comprehensive income(PorL) - revenues expenses income
3. St of changes in equity - how equity changes over an accounting period
4. St of cash flows - how operating, investing and financing activities change the company's
equity
Accounting - answer✔✔The art of interpreting, measuring and communicating the results of a
company's economic activities.
It gives decision makers useful information to help them make right economic decisions
Financial accounting - answer✔✔Information about the financial activities and financial strength
of a company
Qualitative characteristics of information - answer✔✔
Understandability - answer✔✔Info should be understandable by people with reasonable financial
knowledge
Comparability - answer✔✔Info should be comparable with info from previous years or info
from rival companies
Relevance - answer✔✔Info should be relevant to the accounting period they belong to
Objectivity - answer✔✔Info should be neutral(unbiased), complete and free from error
Accounting Principles - answer✔✔
1. Economic entity assumption - answer✔✔Owners are not the same as the company
The company is a separate legal entity that a customer can sue
The owners' income is not the company's income
2. Monetary business assumption - answer✔✔Everything in FS is in monetary terms
3. Time period assumption - answer✔✔FS are prepared for a distinct period in time
4. Historical cost - answer✔✔Every asset should be in the BS at the cost of purchase not at the
current value
5. Full disclosure - answer✔✔FS should present a fair and true view of the company's financial
situation
6. Going concern - answer✔✔We assume that the company will continue to operate as normally
and it will not shut down in the future
7. Matching concept - answer✔✔Income and expenses must be recognised in the accounting
period to which they relate
*Revenues are recognised when they are earned*, not when cash is received
*Expenses are recognised when they occur*, not when cash is paid
8. Realisation concept - answer✔✔Revenues are recognised when a product is sold, *regardless
of when the money is actually received*
9. Materiality - answer✔✔-Info is material if its omission or misstatement influences any
economic decision
-Materiality depends on the size and nature of the product (vehicle vs. sharpener)
-Postage and stationery are put into 'sundry expenses'
-The cost of small value items eg pencils and pens is treated as an expense when they were
purchased even if they last for a long period of time.
10. Prudence - answer✔✔Provisions are made for expenses and losses (not for profits or
revenues). When there are two alternatives for reporting an item, you should choose the one tha
results in less net income.
Limitations to Financial Reporting - answer✔✔1.Different accounting policies: Different
accounting regulatory frameworks in different countries 2.Accounting estimates: When the info
that I include in the FS is not based on verifiable and objective data, then the reliability is
reduced.
3.Professional judgement: The more judgement the better 4.Verifiability 5.Use of historical cost
basis
6.Measurability
7.Limited predictive value
8.Fraud and error
9.Cost-benefit compromise
Definition of balance sheet - answer✔✔a financial statement that reports assets, liabilities, and
owner's equity on a specific date
Definition of assets - answer✔✔Resources owned and controlled by a business
Tangible and intangible
Arise from past events
Expected to give future economic benefits
Why do we look at assets when considering a company? - answer✔✔Assets generate revenues
By looking at them we get an answer to the q "is the financial position of the company strong?"
Manipulation:
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