Accounting Fundamentals

Question 1

What are the three possible structures of for-profit organizations?

Answer 1

Sole proprietorship, partnership, and corporation

Question 2

What are the two main factors of a Sole Proprietorship?

Answer 2

Owned by one person and has unlimited liability

Question 3

What are the two main factors of a Partnership?

Answer 3

Owned by two or more people and has unlimited liability

Question 4

What are the two main factors of a Corporation?

Answer 4

Owned by shareholders and has limited liability

Question 5

Put simply, what is a financial statement?

Answer 5

A record of the financial activities of a business

Question 6

What are the three main types of financial statements?

Answer 6

Income statement, balance sheet, and statement of cash flows

Question 7

What makes up an income statement?

Answer 7

Revenues, expenses, and profit or loss

Question 8

What makes up a balance sheet?

Answer 8

Assets, liability, and therefore equity

Question 9

What makes up a statement of cash flows?

Answer 9

Activities such as operating, investing, and financing

Question 10

What is the magic accounting equation?

Answer 10

Assets = Liabilities + Equity

Question 11

Describe assets

Answer 11

Things owned (inventory, equipment, property, etc) that has future economic benefit

Question 12

Describe liabilities

Answer 12

Things owed to vendors, suppliers, customers, and creditors such as long-term loans and accounts payable

Question 13

Describe equity

Answer 13

Residual value - what’s left over after you subtract the worth of liabilities from the worth of assets

Question 14

What is double-entry accouting?

Answer 14

Categorizing asset/liability/equity into credit or debit based on increase or decrease

Question 15

How are assets ordered?

Answer 15

By liquidity

Question 16

How are liabilities ordered?

Answer 16

By maturity/due dates

Question 17

What equation gets you Gross Profit?

Answer 17

Revenue - Costs of Goods Sold

Question 18

What equation gets you EBITDA

Answer 18

Revenue - COGS - SGA

Question 19

What does EBITDA stand for?

Answer 19

Earnings before interest, taxes, depreciation, and amortization

Question 20

What is the bottom line of an income statement?

Answer 20

Net Profit/Income

Question 21

How does a balance sheet relate to time?

Answer 21

Shows the financial position at a singular point in time

Question 22

How does an income statement relate to time?

Answer 22

Shows the results of operations over a period of time

Question 23

When do “regular entries” happen on income statements and what are some examples?

Answer 23

Happens every day. As sales are made, payments are received, expenses are incurred, and payments are made

Question 24

When do “adjusting entries” happen on income statements and what are some examples?

Answer 24

Happens at the end of the period. They are entries that capture any revenues and expenses that may have been overstated or understated. This may be prepaids, unearned revenue, depreciation or amortization, and accruals of expenses and revenues.

Question 25

What is a “prepayment” and how is it recorded?

Answer 25

Paying for something upfront for a year or more. It is not recorded as an expense at time of purchase. It is recorded as an asset (debited) and cash is credited. The entry is adjusted over time.

Question 26

What is unearned revenue classified as?

Answer 26

A liability credit

Question 27

If work has been completed but the revenue has not been billed, what are the debits and credits?

Answer 27

Debit accounts receivable, and credit revenue

Question 28

If an expense has not been paid, what are the debits and credits?

Answer 28

Debit expense account, and credit accounts payable

Question 29

What is the difference between appreciation and depreciation

Answer 29

Appreciation is when the value goes up over time, depreciation is when it goes down

Question 30

What are the three depreciation approaches?

Answer 30

Straight line approach, units of productions approach, and double declining balance approach

Question 31

Describe the straight line depreciation approach

Answer 31

The asset will decline at a consistent rate over its lifetime. The asset provides the same level of service or production over time. The equation is (Cost - Salvage Value)/Useful Life of Asset

Question 32

Describe the double declining depreciation approach

Answer 32

The asset has a higher level of depreciation at the beginning of its life. The depreciation amount cuts in half each year. The equation is ((100% / Useful Life of Asset)2)Net Book Value.

Question 33

Describe the units of production depreciation approach

Answer 33

The more the asset is used, the higher the cost of depreciation. The equation is (# of Units Produced/Lifetime # of Units)*(Cost - Salvage Value)

Question 34

What are the benefits of a cash flow statement?

Answer 34

Provides insight into how efficiently and effectively cash is being generated and used. One can understand where cash comes from and how it was been utilized.

Question 35

What are the two methods for creating a cash flow statement and which is more common?

Answer 35

Direct and indirect - indirect is more common

Question 36

What are the three main sections on the cash flow statement? (indirect)

Answer 36

Operating, Investing, and Financing

Question 37

What is shown in the Operating section of a cash flow statement?

Answer 37

Operating transactions that relate direction to the generation of revenue for the company.

Question 38

What is shown in the Investing section of a cash flow statement?

Answer 38

Investing transactions include decisions around the purchase of assets that support the operations.

Question 39

What is shown in the Financing section of a cash flow statement?

Answer 39

Financing transactions are based on management’s decisions to fund business activities (e.g. raising equity or raising debt financing)