CHAPTER 2

Question 1

_________ refers to the systematic and detailed recording of financial transactions of a business.
_________ is the process of recording financial transactions pertaining to a business

Answer 1

Accounting

Question 2

includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities.

Answer 2

accounting process

Question 3

Why accounting is important?

Answer 3

• it helps you track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.
  -The financial statements used in accounting are a concise summary of financial transactions over an accounting period, summarizing a company’s operations, financial position, and cash flows.

Question 4

Three Financial Statements Generated by your Records

Answer 4

1. income statement
2. balance sheet
3. cash flow statement

Question 5

It is a structure of accounting methods focused on taxes rather than the appearance of public financial statements.
__________ is governed by the Internal Revenue Code, which dictates the specific rules that companies and individuals must follow when preparing their tax returns.

Answer 5

Tax Accounting

Question 6

Tax Accounting deals with

Answer 6

Taxes
Tax Preparation
Tax Returns
Tax Payments

Question 7

is a method of accounting whereby all items of gross income received during the year shall be accounted for such taxable year and that only expenses actually paid for shall be claimed as deductions during the year.
This method of accounting is generally used by taxpayers who do not keep regular books of accounts.
Under this method, income is realized upon receipt of cash or its equivalent including those constructively received (such as deposits for the taxpayer’s account by customers) but not including gifts or donations.
Users of __________ accounting are mostly individuals engaged in business and practice of profession, professional partnerships and professional service organizations.

Answer 7

Cash Basis

Question 8

is a method of accounting for income in the period it is earned regardless of whether it has been received or not.
In the same manner, expenses are accounted for in the period they are incurred and not in the period they are paid.
Under this method, net income is being measured by the excess of income earned during the period over the expenses incurred.
Expenses not being claimed as deductions by taxpayers in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year.

Answer 8

Accrual Basis

Question 9

is an accounting method applicable to contractors in the construction of building, installation of equipment and other fixed assets, or other construction work covering a period in excess of one year.
Under this method, gross income is to be reported in the taxable year in which the contract is fully completed and accepted by the contractee if the taxpayer elected it as a consistent practice to treat such income, provided that such method clearly reflects the net income. All expenditures, are deducted from gross income during the life of the contract which are properly allocated thereto, taking into consideration any materials and supplies charged to the work under the contract but remaining on hand at the time of the completion.

Answer 9

Completion of Contract Basis

Question 10

is a method applicable in the case of a building, installation or construction contract covering a period in excess of one year whereby gross income derived from such contract may be reported upon the basis of percentage of completion.
In determining the percentage of completion of a contract, generally one of the following methods is used:
1. The costs incurred under the contract as of the end of the tax year are compared with the estimated total contract costs; or
2. The work performed on the contract as of the end of the tax year is compared with the estimated work to be performed.

Answer 10

Percentage of Completion Basis

Question 11

a method considered appropriate when collections extend over relatively long periods of time and there is a strong possibility that full collection will not be made.
As customers make _________ payments, the seller recognizes the gross profit on sale in proportion to the cash collected.

Answer 11

Installment Basis

Question 12

is a method applicable only to farmers engaged in the production of crops which take more than a year from the time of planting to the process of gathering and disposal.
Expenses paid or incurred are deductible in the year the gross income from the sale of the crops are realized.

Answer 12

Crop Year Basis

Question 13

provides you with information about the profit and loss

Answer 13

Income Statement

Question 14

gives you a clear picture on the financial position of your business on a particular date.

Answer 14

Balance Sheet

Question 15

is a bridge between the income statement and balance sheet and reports the cash generated and spent during a specific period of time.

Answer 15

cash flow