Chapter 1-4 Accounting Intro/Cycle

Question 0

fair value

Answer 0

the amount the asset could be sold for in the market

Question 1

cost principle

Answer 1

assets must be recorded at the value paid

Question 2

monetary unit assumption

Answer 2

only transactions that can be reliably expressed as an amount of money can be included in the records

Question 3

Steps of the accounting cycle + optional steps

Answer 3

1. Analyze transactions
2. Journalize transactions
3. Post to general ledger
4. Prepare trial balance
5. Prepare worksheet (optional)
6. Journalize and post adjusting entries
7. Financial statements
8. Journalize and post closing entries
9. Post closing trial balance
10. Reversing entries (optional)

Question 4

Why are adjusting entries necessary?

Answer 4

Some events are not recorded daily (e.g. use of supplies), some costs are not recorded because they expire with time, some items are unrecorded at the end of the fiscal year (e.g. utility bill for current period, but not received until next period)

Question 5

What is the difference between accrual and cash basis accounting?

Answer 5

For accrual basis accounting, events are recorded in the period when they occur, no matter when cash is paid/received. For cash basis accounting, revenue/expenses are recorded when cash is paid/received.

Question 6

What is the difference between a fiscal year and an interim period?

Answer 6

A fiscal year is an accounting period that is 1 year long, whereas an interim period is less than one year.

Question 7

2 types of adjusting entries

Answer 7

Prepayments: cash is paid/received beforehand
Accruals: revenue/expenses incurred but cash is not yet received/paid

Question 8

What is the objective of financial reporting?

Answer 8

To provide useful information to EXTERNAL users to make DECISIONS about a business

Question 9

Nominal vs Real accounts

Answer 9

Nominal (temporary, RED) accounts only apply to the current period, and are closed at the end of the period.
Real (permanent) account balances are carried forward into the next period.

Question 10

What does IFRS, GAAP, AcSB, and ASPE stand for?

Answer 10

IFRS - International Financial Reporting Standards
GAAP - Generally Accepted Accounting Principles
AcSB - Accounting Standards Board
ASPE - Accounting Standards for Private Enterprises

Question 11

Economic entity concept

Answer 11

Accounting for the activities of an organization must be kept separate from that of the owner(s)

Question 12

Main similarity between IFRS and ASPE (think “_____” based)

Answer 12

They are both “principles based” and not “rules based”, encouraging the use of professional judgement as opposed to following specific instructions.

Question 13

True or False: Private companies have a choice between using IFRS or ASPE

Answer 13

True

Question 14

3 differences that could arise with IFRS balance sheets

Answer 14

1. Statement name - “Statement of Financial Position”
2. Classification of assets - “Non-current assets”
3. Order of items - could be in reverse liquidity order

Question 15

Double entry system of accounting

Answer 15

Each transaction must affect 2 or more accounts

Question 16

What is an audit report?

Answer 16

An audit report is a written opinion of an auditor regarding whether an entity’s financial statements present fairly its financial position.

Question 17

Difference between GAAP and IFRS

Answer 17

GAAP is more broad, while IFRS includes more “strict rules”

Question 18

Level of accounting information required for IFRS and ASPE

Answer 18

IFRS - users require extensive detailed information

ASPE - users require less information

Question 19

Equity and income reporting differences between IFRS and ASPE

Answer 19

IFRS - Statement of Shareholder’s Equity; Income Statement and Statement of Comprehensive Income
ASPE - Statement of Owner’s Equity/Partner’s Equity/Retained Earnings; Income Statement

Question 20

fiscal year vs. interim period

Answer 20

A fiscal year is an accounting period that is one year long while an interim period is an accounting period that is LESS than one year

Question 21

4 Steps to prepare closing entries

Answer 21

1. Close revenue to income summary
2. Close expenses to income summary
3. Close income summary to capital account
4. Close drawings to capital account

Question 22

Limited vs. Unlimited liabiltiy

Answer 22

Unlimited liability - when the owner(s) are personally responsible for the debts of the business
Limited liability - the only amount the shareholder risks losing is their investment

Question 23

Working capital

Answer 23

Shows company’s ability to pay short term debts;

CA - CL = Working capital

Question 24

Current ratio

Answer 24

Measures ability to pay short term debts;

CA / CL = Current ratio

Question 25

Acid test ratio

Answer 25

Measure of a company’s immediate short term liquidity;

(Cash+Short term investments+Receivables) / CL = Acid test ratio

Question 26

What is NOT depreciated?

Answer 26

Land

Question 27

In the worksheet, what columns are profit entered in?

Answer 27

Income statement (Dr) and Balance sheet (Cr)

Question 28

Entry to close expenses

Answer 28

Dr. Income Summary

Cr. Expenses

Question 29

Entry to close revenue accounts

Answer 29

Dr. Income Summary

Cr. Revenue

Question 30

Closing income summary in the event of a profit/loss

Answer 30

Profit: 
Dr. Income Summary
     Cr. Capital
Loss:
Dr. Capital
     Cr. Income Summary