Chapters 1 & 2

Question 0

What is the “Measurement or Cost Principle”?

Answer 0

Information is based on the actual cost and is verifiable and supported by reliable, unbiased & independent evidence.

Question 1

What does GAAP stand for?

Answer 1

Generally Accepted Accounting Practices

Question 2

What is the “Revenue Recognition Principle”?

Answer 2

Revenue must be recognized (Recorded) when it is earned.

Question 3

What is the “Expense Recognition or Matching Principle”?

Answer 3

It prescribes that a company record the expenses it incurred to generate the reported revenue.

Question 4

What is the “Full Disclosure Principle”?

Answer 4

It’s details behind financial statements that would impact end users decisions.

Question 5

What is the “Going Concern Assumption”?

Answer 5

It assumes a business will continue operating instead of being closed or sold.

Question 6

What is the “Monetary Unit Assumption”?

Answer 6

Means we can express transactions in monetary units.

Money is the common denominator in business.

Question 7

What is the “Time Period Assumption”?

Answer 7

It presumes a company can be divided into time periods, such as weeks, months, etc so useful reports can be prepared for those periods.

Question 8

What is the “Business Entity Assumption”?

Answer 8

That the business is accounted for separately from other businesses including its owners.

Question 9

What is the “Accounting Equation”?

Answer 9

Assets = Liabilities + Owner Equity

Question 10

What are “Assets”?

Give some examples of Assets.

Answer 10

Assets are resources owned or controlled by a company that have expected future benefits.

Examples: Cash, Accounts Receivable, Prepaid Accounts, Supplies, Equipment, Land, Buildings, Etc.

Question 11

What are “ Liabilities”?

Give some examples.

Answer 11

It’s what a company owes, such as money or services.

Examples:
Accounts Payable, Unearned Revenue, Accrued Liailities.

Question 12

What is “Equity”?

Answer 12

It’s Capital, Net Worth or other things owned free and clear.

Question 13

Equity increases when….

Answer 13

1. Owner invests money or property in the business.
2. Business earns revenue by providing a service or selling a product.
   Examples: Service Revenues, Fees Earned, Sales, etc.

Question 14

Equity decreases when….

Answer 14

1. Owner withdraws cash from the business (Owner Withdrawals).
2. Business uses something to earn revenues.
   Examples: Wages Expense, Rent Expense, Utilities Expenses, etc.

Question 15

What is a “Business Transaction”?

Answer 15

Exchange of value between two entities which causes the accounting equation to change. Every transaction affects at least two accounts, and after every transaction the accounting equation must stay in balance.

Question 16

Name four types of “Financial Statements”.

Answer 16

1. Income Statement: Revenues - Expenses = Net Income
2. Owners Equity Statement: Beginning balance in Capital + Investments + Net Income - Withdrawals = Ending Balance
3. Balance Sheet: Assets = Liabilities + Owners Equity
4. Statement of Cash Flow: (Future Class)

Question 17

What is, and how do you calculate ROA?

Answer 17

Return On Assets
Net Income
(From the annual Income statement)
Return On Assets = —————————————- = 0.0%
Average Total Assets
(Add the beginning and ending amounts)
(For that same period and divide by 2)

Question 18

How is “Net Income” calculated?

Answer 18

By subtracting total expenses from total revenues.

Question 19

How is the End-of-period Owners Equity calculated on the “Statement of Owners Equity”?

Answer 19

Beginning Capital + Investments + Net Income - Withdrawals = Ending Capital

Question 20

What is the purpose of “Accounting”?

Answer 20

The purpose of Accounting is to identify, record, and communicate relevant, reliable and comparable information about an organizations business activities.

Question 21

What is an “Account”?

Answer 21

An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

Question 22

What is a “General Ledger”?

Answer 22

A Ledger is a record containing all accounts used by a company.

Question 23

What is a “Chart of Accounts”?

Answer 23

It’s a list of ledger accounts and includes an identification number assigned to each account.

Question 24

What is “Double Entry Accounting”?

Answer 24

Double Entry Accounting requires that for each transaction:

1. A least two accounts are involved, with at least one debit and one credit.
2. The total amount debited must equal the total amount credited.
3. The accounting equation must stay in balance.

Assets increase with Debits and Decrease with Credits (Left side of Accounting Equation.)
Liabilities increase with Credits (Right side of Accounting Equation.)

Question 25

What are the “Normal Balance” sides for Assets, Liabilities and Equity?

Answer 25

The LEFT side is the NB for Assets, meaning “Debits” Increase.
The RIGHT side is the NB for both Liabilities AND Equity, meaning the credits INCREASE.
(Capital)
(D) Assets (C) (D) Liabilities (C) (D) Equity (C)
——————– = ——————– + ——————
+ I - - I + - I +
I I I

      Debits                  Credits
   ---------------------------------
      AWE            I         CRL
                          I Assets                          Capital Withdrawals                 Revenue Equity                           Liabilities

Question 26

In a “Ledger or T-Account” which side is the “Debit” side and which is the “Credit” side?

Answer 26

Debits on the Left, Credits on the Right.

Question 27

When Recording Transactions what are the 4 steps in the process?

Answer 27

1. Identify the transaction and any source documents.
2. Analyze the transaction using the accounting equation.
3. Record the transaction in journal entry form applying “Double Entry” accounting.
4. Post the entry (in a T-Account).

Question 28

How do you calculate “Debt Ratio”?

Answer 28

Total Liabilities divided by Total Assets

Question 29

What are the 5 steps in recording account information?

Answer 29

1. Analyze transactions
2. Record in Journal
3. Post (copy) to Ledger (T-Accounts)
4. Prepare a list (Trial Balance)
5. Prepare Financial Statements