Class 2: Financial Accounting

Question 1

What is the assets equation?

Answer 1

Assets = Liabilities + shareholders equity.

Question 2

Define Assets

Answer 2

Resources PRESENTLY OWNED that will generate future economic benefits.

Question 3

Define Liabilities

Answer 3

Amounts presently OWED by a business

Question 4

Define Shareholders Equity

Answer 4

The amount invested and reinvested in a company by its shareholders

Question 5

What are the 2 sources of financing

Answer 5

1. Issue shares e.g business receives $5000, the business gives share certificates. (does not have to repay)
2. Obtain a loan - in dept to banks

Question 6

why are investment activities important to a business?

Answer 6

A business must invest in assets required to operate the business. assets can be purchased with cash or an account

Question 7

Accounting for business activities

Answer 7

picture the documented activity, name whats exchanged (business has received and given) , analyze the effects (show how the costs cause the elements of the accounting equation to increase or decrease.

Question 8

What are transactions?

Answer 8

transactions are activities that have a direct economic effect on the assets, liabilities or shareholders equity

Question 9

what are external exchanges?

Answer 9

involve assets, liabilities and shareholders equity between the company and someone else.

Question 10

What are Internal events?

Answer 10

Occur within the company; for example, using assets to create an inventory product

Question 11

What is the accounting cycle?

Answer 11

a systematic process that is used to capture and report the financial effects of a company’s activities.

Question 12

What is step 1 of the accounting cycle? what is duality of effects?

Answer 12

step 1 is to analyze transactions. duality of effects means that every transaction has at least 2 effects on the basic accounting equation. A = L + SE

Question 13

What is a chart of accounts

Answer 13

summary of all account names and corresponding numbers used to record financial results in the accounting system

Question 14

Is an exchange of only promises e.g receives promise for future delivery and gives promise to pay for purchase, a transaction

Answer 14

No, it does not effect the accounting equation

Question 15

what are steps 2 and 3 of the accounting cycle?

Answer 15

Record and summarize

Question 16

when is the 3 step process of analyze, record and summarize applied

Answer 16

applied to daily transactions, adjustments at the end of the month, closing process (occurs at the end of the year)

Question 17

What is the difference between journals and ledgers?

Answer 17

Journals: used to reord the effects of each days transactions (organized by date)
Ledgers: used to summarize the effects of journal entries on each account; organized by account

Question 18

What is the debit/credit framework

Answer 18

accounts increase on the same side as they appear in the accounting equation. Assets increase on the left side. Liabilities and SE increases on the right side. Left is debit and right is credit.

Question 19

What do we use debits for?

Answer 19

Increase in assets
Decrease in liabilities
Decrease in SE accounts

Question 20

What do we use credits for?

Answer 20

Increases in liabilities
Increase SE
Decrease in asset accounts

Question 21

Recording journal entries

Answer 21

used to record transactions and indicate effects in a debits - equal - credit format.
1. date
2. debits written first and credits below
3. total dollar value of debits = total dollar value to credits
4. dollar signs not used
5. reference column
6. brief explanation of the transaction is written below the debits and credits.

Question 22

What is posting

Answer 22

It is the process of transferring details of journal entries into the corresponding ledger accounts

Question 23

What are T - accounts

Answer 23

Simplified version of a ledger that is used for summarizing the effects of journal entries

Question 24

What is a trial balance

Answer 24

an internal report that lists all accounts and their balances, and provides a check on debits = credits

Question 25

what is a classified balance sheet?

Answer 25

shows the subtotals for current assets (assets that will be used up or converted into cash within 12 months) and current liabilities

Question 26

what are current liabilities

Answer 26

1. Debts and obligations that will be paid, or fulfilled within 12 months.
2. Short-term obligations that will be paid with current assets within the current operating cycle or one year (whichever is longer)

Question 27

What is the ratio used to evaluate liquidity

Answer 27

Current ratio: used to evaluate liquidity, which is the ability to pay liabilities as they come. Tells us whether current assets are sufficient to pay current liabilities. Current assets / current liabilities

Question 28

what is the purpose of a balance sheet?

Answer 28

Is to report what a company owns and owes. Measurable exchanges are recorded. Does not define the worth of a company

Question 29

what is cost principle

Answer 29

Assets and liabilities recorded at the amounts that were measurable at the time the transaction occur.

Question 30

what are retained earnings?

Answer 30

are a firm’s cumulative net earnings or profit after accounting for dividends. They’re also referred to as the earnings surplus