Accounting Basics

Question 1

What are the three basic accounting activities??

Answer 1

1. Identify
2. Record
3. Communicate

Question 2

Who are the users of accounting?

Answer 2

Internal and external

Question 3

What is the GAAP?

Answer 3

Generally accepted accounting principles
- Universally practiced

Question 4

What 2 measurements does GAAP use?

Answer 4

1. Historical cost principle
2. Fair value principle

Question 5

What does it mean when something is financially Revelance?

Answer 5

Financial information that is capable of making a difference in decision

Question 6

What does it mean when something is faithful representation?

Answer 6

The numbers and descriptions match what really existed or happened
- Factual

Question 7

Historical Cost Principle

Answer 7

Dictates the companies record their assets a cost
True at the time the asset is purchased but also true over the time the asset is held

Question 8

Fair Value Principle

Answer 8

Assets and liabilities should be reported at the price received to sell an asset or settle a liability

Question 9

What are the two main accounting assumptions?

Answer 9

1. Monetary Unit Assumptions
2. Economic Entity Assumptions

Question 10

Monetary Unit Assumption

Answer 10

Requires that companies include in the accounting records only transaction data that can be expressed in money terms.

For example, the health of a company’s owner, the quality of service, and the morale of employees are not included.

Question 11

Economic Unity Assumption

Answer 11

Requires that the activities of the entity be kept separate and distinct from those of its owner and other economic entities

- Brian hill must keep his personal expenses separate from his company expenses

Question 12

The Basic Accounting Equation

Answer 12

Assets = Liabilities + Stockholder’s Equity

Question 13

Assets

Answer 13

Assets are the resources the business owns
- The capacity to provide future services or benefits
- Service potential or future economic benefit results in cash inflows (receipts)

Question 14

Liabilities

Answer 14

Are claims against assets, existing debts and obligations

Accounts payable
Notes Payable
Salaries and wages payable
Sales and real estate taxes payable

Question 15

Stockholder’s Equity

Answer 15

The ownership claim on a company’s total assets in stockholders equity
1. Common Stock
2. Retained Earnings

Question 16

Common Stock

Answer 16

The total amount paid in by stockholders for the shares they purchase

Question 17

Retained Earnings

Answer 17

Determined by revenues, expenses and dividends

Question 18

Revenues

Answer 18

Are the increases in assets or decreases in liabilities resulting from the sale of goods or the performance of services in the normal course of business:

result of an increase in an asset
- Sales, fees, services, commissions, interest, dividends, royalties, and rent

The effect of revenues is positive, an increase in stockholders equity coupled with an increase in assets or decrease in liabilities

Question 19

Expenses

Answer 19

The cost of assets consumed or services used in the process of generating revenue
They are decreases in stockholders equity that result from operating the business

• The effect of expenses is negative, a decrease in stockholders equity paired with a decrease in assets or an increase in liabilities

Question 23

Dividends

Answer 23

Net income represents an increase in net assets which are available to give to stockholders

• The distribution of cash to stockholders is called a dividend
• Dividends reduce retained earnings
• Dividends are NOT an expense

Question 25

Income Statement

Answer 25

Presents the revenues and expenses and resulting net income or net loss for a specific period of time

Question 26

Retained Earnings Statements

Answer 26

Summarizes the changes in retained earnings for a specific time period

Question 27

Balance Sheet

Answer 27

Reports assets, liabilities, and stockholders equity of a company at a specific date

Question 28

Statement of Cash Flows

Answer 28

Summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time