Basic Accounting Concepts: The balance sheet

Question 1

How does the information need to match the relevance criterium in a balance sheet?

Answer 1

To match the relevance criterium the information must be meaningful and useful for the users of the financial statement

Question 2

How does the information need to match the objectivity criterium in a balance sheet?

Answer 2

To match the objectivity criterium the information must not be by personal biases

Question 3

How does the information need to match the feasability criterium in a balance sheet?

Answer 3

To match the feasability criterium the information must not have any complexity or cost in the implementation process

Question 4

Which are the 11 basic concepts adopted by the FASB to support the general accounting principles?

Answer 4

• Money measurement
• Entity
• Going concern
• Cost
• Dual aspect
• Accounting period
• Conservatism
• Realization
• Matching
• Consistency
• Materiality

Question 5

What does the money measurement concept stand for?

Answer 5

It stands for the usage of only information that can be expressed in monetary terms, whiche provides a common denominator

Question 6

What is an economic entity?

Answer 6

Basically the business run by someone, it may be profit or non profit, an hospital, a studio or anything

Question 7

What says the entity basic concept?

Answer 7

It says that accounts are kept for entities, separately from the personal accounting of the people that work for the entity

Question 8

What does the going concern state?

Answer 8

It states that accounts for an entity must be kept as if it will operate for an indefinitely long period of time in the future and its resources will be used in its future operations

Question 9

What does the cost concept state?

Answer 9

It states that evey information must be recorded by the cost at which it was bought and is not affected by the current value of the asset if it is a non monetary asset. If it is a monetary asset it should be recorded initially by their cost and subsequently by the fair value

Question 10

What are the two types of asset?

Answer 10

Monetary and non monetary asset

Question 11

What is the fair value?

Answer 11

It is the value at which the asset can be exchanged in a current transaction.

Question 12

What is a book value?

Answer 12

It is the historical cost shown in an accounting record

Question 13

What does the dual aspect concept state?

Answer 13

It states that as all assets are claimed by someone (the owner or the creditors) they are the sum of liabilities and owner’s equity and as such they have to be recorded in both assets and liabilities and owner’s equity in the balance sheet (for this reason they are equal at the end of the recording)

Question 14

What are equities?

Answer 14

Equities are the claims of different parties against assets

Question 15

What are current assets?

Answer 15

They are cash and other assets that are expected to be Realized in cash or Sold or Consuming during the normal operating cycle of the company or within one year

Question 16

What is cash in the current assets?

Answer 16

Cash is funds that are readily available for distribution

Question 17

What are marketable securities in the current assets?

Answer 17

They are ionvestments that are readily marketable and are expected to be converted in cash within one year

Question 18

What are accounts receivable in the current assets?

Answer 18

They are amounts owed to the entity by its customers

Question 19

What are inventories in the current assets?

Answer 19

They are items ready for sale, in process of production or soon to be consumed

Question 20

What are prepaid expenses in the current assets?

Answer 20

They are assets, usually of intangible nature, whose usefulness will expire in the near future, such as insurance policies

Question 21

What types of non current assets exist?

Answer 21

Plant, property and equipment and other assets

Question 22

What are plant, property and equipment?

Answer 22

They are tangible assets that are relatively long lived and used to produce goods and services that will generate future cash inflows

Question 23

What is accumulated depreciation in the property, plant and equipment voice?

Answer 23

It is a portion of the original cost of the asset that is written off and allocated as a cost of doing business

Question 24

What are investments in other assets?

Answer 24

They are securities of one company owned by another in order to either control the company or in anticipation of earnings for a long-term return from the investment

Question 25

What are intangible assets in other assets?

Answer 25

They are non physical things controlled by the business, such as patents, copyrights, trademarks…

Question 26

What are accounts payable in the current liabilities entry?

Answer 26

They are the claims of suppliers that are still not payed

Question 27

What are current liabilities?

Answer 27

Thay are liabilities expected to be extinguished or satisfied within one year or the current operating cycle

Question 28

What are taxes payable in the current liabilities entry?

Answer 28

They are the amount that the company owes to the government as taxes

Question 29

What are accrued expenses in the current liabilities entry?

Answer 29

They are expenses that incurred in an accounting period but are paid in the next (furnitures taken 15th December but paid 15th January)

Question 30

What are deferred revenues in the current liabilities entry?

Answer 30

They represent the liability that arises because the entity received an advance payment for a service that will render in the future

Question 31

What is the current portion of a long terrm debt in the current liabilities entry?

Answer 31

It is the part of a long term loan due within the next 12 months

Question 32

What are other liabilities?

Answer 32

They are those liabilities that do not match current liabilities criteria. They are also called noncurrent liabilities or long term debt

Question 33

How is the owner’s equity divided?

Answer 33

It is divided into paid-in capital and retained earnings

Question 34

What is the paid-in capital?

Answer 34

It is the amount the owners have invested directly in the business by purchasing shares of stock

Question 35

How is it subdivided the paid-in capital?

Answer 35

It is divided into capital stock and additional paid-in capital

Question 36

Capital stock = ?

Answer 36

value per share * number of shares

Question 37

What is the additional paid-in capital?

Answer 37

It is the excess value paid by investors

Question 38

How can the owners equity get modified?

Answer 38

By having earnings (it increases) or by paying out earnings in form of dividend (it decreases)

Question 39

Retained earnings = ?

Answer 39

Total Earnings of the Entity - Total Amount of Dividends

Question 40

Current ratio = ?

Answer 40

(Current Assets) / (Current Liabilities)

Question 41

Which assets should be amortized?

Answer 41

Both tangible and intangible ones, but not lands as their service life is supposed to be infinite, in case of plant and equipment it is more correct to use the term depreciation

Question 42

What is depreciation?

Answer 42

It is a process of allocation of the original cost of an asset to the period of time in which the asset provides benefit to the company