Accounting Exam 1

Question 1

What are the general purpose reports?

Answer 1

They are the external reports.

eg, income statement, balance sheet, and cash flow statement

Question 2

What are the special purpose reports?

Answer 2

They are the internal reports which differ according to the firm producing them as they focus on the business individual needs.

Question 3

Define Financial Reports

Answer 3

The function of financial reports is to communicate information to users in order to facilitate the decision-making process.

Question 4

Define Cash flow ratios

Answer 4

Cash flow ratios focus on the sufficiency of cash to cover cash flow needs and the efficiency of the enterprise to generate cash.

Question 5

State the three cash flow ratios

Answer 5

cash flow to revenue
cash flow to adequacy
long-term debt payment

Question 6

Cash flow to revenue

Answer 6

indicates the entity’s efficiency in converting revenue based on accrual sales and other revenue to cash
Strategies
- increased cash received from operating activities
- increased cash sales compared with credit sales
- introduce EFTPOS facilities
- improve credit collection rate

Question 7

Cash flow adequacy

Answer 7

indicates the ability of an enterprise to generate cash to cover immediate cash obligations.
Strategies
-increase cash from operations
-investigate any apparent increases in cash assets, PPE, drawings or debt repayments.

Question 8

Long-term debt payments

Answer 8

indicates an enterprises ability to make its long-term contractual payments.
Strategies
-increase cash from operations
decreases debt

Question 9

Interested parties of financial reports

Answer 9

investors, suppliers, employees, customers, competitiors

Question 10

Investors

Answer 10

sell, retain or increase their investment

Question 11

Suppliers

Answer 11

stop, continue, or expand credit facility

Question 12

Employees

Answer 12

look for other employment or remain with the present employer

Question 13

Customers

Answer 13

look for other providers or remain with the present supplier

Question 14

Competitors

Answer 14

percentage of the available market

Question 15

Name 3 estimated/ opinion accounts in the income statement

Answer 15

depreciation, doubtful debts, cost of goods sold

Question 16

Depreciation

Answer 16

Depreciation is calculated in order to estimate the cost of non-current assets that should be allocated to the accounting periods in which it is used to generate revenue.

• a direct result of the matching principle - accounting period assumption
• value is subjective - due to the method chosen (reducing balance or straight line)

Question 17

Doubtful Debts

Answer 17

the value of doubtful debts is subjective as it is dependent on two general factors;

• perception of the current economic climate
• the effectiveness of credit policy

The true value of the debts that will be bad will not be known until later. The calculation is based on historic records of accounts receivable together with a perception of whether or not the economic climate is favourable or unfavourable.