Chapter 1

Question 1

Financial accounting

Answer 1

focused on decision-makers outside the company

Question 2

managerial accounting

Answer 2

focused on decision-makers inside the company

Question 3

what can create ethical pressure on management

Answer 3

preparation of financial statements, IFRS, auditors

Question 4

preparation of financial statements

Answer 4

involves and understanding of complex accounting rules and a significant number of assumptions and estimation

Question 5

IFRS

Answer 5

allows for differing accounting treatments for the same transaction

Question 6

corporation

Answer 6

a company that has many owners who are not concerned with managing the daily operations of a company

Question 7

partnerships

Answer 7

has two or more parties as co-owners and each owner is a partner

Question 8

sole proprietorship

Answer 8

an entity with a single owner

Question 9

Income

Answer 9

revenues - expenses

Question 10

accounting equation

Answer 10

liabilities + equity

Question 11

balance sheet

Answer 11

represents the company’s financial position

Question 12

income statement

Answer 12

represents the company’s financial performance

Question 13

changes in equity statement

Answer 13

represents the beginning balance of equity plus net income minus dividends that are paid and minus reclassifications and other reserves

Question 14

cash flow statement

Answer 14

reports cash flows under operating, investing and financial activities

Question 15

how the financial statements link together?

Answer 15

1. the cash flow statement links beginning and ending cash of the balance sheet
2. The income statement links beginning and ending of the retained earnings in the change of equity statement
3. The statement of changes in equity links the beginning and ending in equity in the balance sheet

Question 16

return on equity ratio

Answer 16

ROE = (net income)/average total income

Question 17

debt-to-equity

Answer 17

D/E = total liabilities/total equity

Question 18

BIDE

Answer 18

Beginning retained earnings + net income – dividends = ending retained earnings

Question 19

Net ratio

Answer 19

Net ratio = Dividend/net income

Question 20

assets

Answer 20

economic resources controlled by the entity to produce future economic benefits

Question 21

Current assets

Answer 21

expected to be converted to cash, sold or consumed during the upcoming twelve months

Question 22

example of current assets

Answer 22

cash/cash equivalents; accounts receivables; notes receivables; inventory; prepaid expenses

Question 23

non-current assets

Answer 23

long-term assets and long-term investments which will not be converted into cash within next year

Question 24

example of non-current assets

Answer 24

1. Fixed assets: PPE
2. long-term investments
3. Intangible assets
4. Other non-current assets (long-term prepayment, deferred tax assets)

Question 25

liabilities

Answer 25

obligations to pay and expected to result in an outflow of economic benefits

Question 26

current liabilities

Answer 26

obligation to pay within the next twelve months

Question 27

example of current liabilities

Answer 27

1. accounts or trade payable: amount a company has to pay to its creditors 2. accrued liabilities: an expense that the company has not yet paid for 3. Short-term debt: borrowings that have to be paid within a year 4. Deferred revenues: when the company collects cash from its consumers in advance of ‘earning’ the revenue 5. Current maturities of long-term debt: the part of long-term that has to be paid this year

Question 28

non-current liabilities

Answer 28

obligations that are most likely to require an outflow of economic benefits after one year

Question 29

example of non-current liabilities

Answer 29

1. Long-term debt: borrowings that are due beyond the financial year 2. Other non-current liabilities

Question 30

equity

Answer 30

residual interest in the entity's assets after deducting liabilities, which represent the residual claim of the shareholder to entity assets

Question 31

example of equity

Answer 31

1. share capital/capital stock 2. contributed surplus/share premium: the extra value besides the value of a share that has been received from the primary owner 3. treasury shares: shares that are brought back by the firm 4. retained earnings 5. Accumulated other comprehensive income or loss: can include various reserves and non-controlling interests. These are changes in equity that are not mentioned on the income statement

Question 32

contributed capital

Answer 32

share capital surplus + treasury shares

Question 33

earned capital

Answer 33

retained earnings + accumulated other comprehensive income/loss

Question 34

revenue

Answer 34

net sales and income-generating activities (financial services, travel services, rental income, franchise fees)

Question 35

expenses

Answer 35

cost of goods sold

Question 36

accrual accounting

Answer 36

If the transaction has not been made, transaction is recorded

Question 37

gross profit

Answer 37

difference between the cost of goods sold and the revenue

Question 38

1st way to measure liquidity

Answer 38

net working capital = current assets - current liabilities

Question 39

2nd way to measure liquidity

Answer 39

curent ratio = total current assets/total current liabilities

Question 40

3rd way to measure liquidity

Answer 40

Quick ratio = (cash + short term securities + accounts receivable)/(current liabilities)

Question 41

accounting cycle

Answer 41

a sequence of activities to accumulate and report financial statements

Question 42

chart of accounts

Answer 42

lists the titles and numbers of all accounts found in the general ledger

Question 43

deferral adjustments

Answer 43

allocating assets to expense and allocating unearned revenues to revenue

Question 44

accrual adjustments

Answer 44

accruing expenses and accruing revenues

Question 45

deferred revenue

Answer 45

allocating unearned revenue to revenue

Question 46

prepaid expenses

Answer 46

allocating assets to expenses

Question 47

depreciation

Answer 47

allocating costs of equipment to the periods benefiting from their use

Question 48

straight-line depreciation

Answer 48

process of diving the asset cost by estimated useful life to find the annual depreciation expense

Question 49

contra accounts

Answer 49

used to record reductions in or offsets against a related account

Question 50

accumulated depreciation

Answer 50

contra asset reported in the BS which enables users to estimate asset age

Question 51

accrued revenues

Answer 51

companies often provide services or earn income during a period that is neither paid nor billed at the end of it

Question 52

accrued expenses

Answer 52

companies often incur expenses before paying for them

Question 53

temporary accounts

Answer 53

consist of revenues and expenses and accumulate data that relates to a specific accounting period

Question 54

closing process

Answer 54

retained earnings account can be used to close the temporary revenue and expense accounts

Question 55

cash equivalents

Answer 55

short-term, highly liquid investments that are easily convertible into a known amount of cash and are subject to an insignificant risk of change in value

Question 56

operating activities (cash flow)

Answer 56

selling goods or rendering service

Question 57

investing activities

Answer 57

involve the acquisition and disposal of a PPE assets, intangible assets, the purchase and sale of gov securities and securities of other company

Question 58

financing activities

Answer 58

when the company receives cash from shareholders, returns cash to shareholders, borrows from creditors, and repays amounts borrowed

Question 59

cash flow formula 1

Answer 59

cash flow = net income - change in accounts receivable + change in unearned revenue

Question 60

cash flow formula 2

Answer 60

Cash flow = net income – change in inventory + change in accounts payable

Question 61

cash flow formula 3

Answer 61

Cash flow + change in prepaid insurance = net income

Question 62

cash flow formula 4

Answer 62

Cash flow = net income + depreciation expense

Question 63

cash from operations

Answer 63

Net income + depreciation expense + noncash operating expenses – change in operating assets + change in operating liabilities = cash from operations

Question 64

operating assets

Answer 64

receivables, inventories, prepaid expenses, similar assets

Question 65

operating liabilities

Answer 65

accounts and wages payable, accrued expenses, unearned revenues, taxes payable, interest payable, similar items