FINANCIAL ACCOUNTING

Question 1

Who needs accounting information

Answer 1

Internal users (managers), external users (investors, creditors, employees, gov agencies)

Question 2

characteristics of Financial accounting

Answer 2

Compulsory, based on past performance, oriented towards external users, prepared yearly, reliable and accurate

Question 3

What is a transaction?

Answer 3

It is an economic interchange between entities and may not involve cash immediatly

Question 4

The annual report

Answer 4

It includes four financial statements: balance sheet, income statement, statement of changes in owners’ equity, statement of cash flows

Question 5

The balance sheet

Answer 5

Financial position of an entity at one point of time, the end of the fiscal period

Question 6

Depreciation

Answer 6

The process of spreading the cost of equipment over its useful life; it is the portion of the cost of the equipment which is estimated to have been used up; it is subtracted in the balance sheet > assets

Question 7

The activities of a company

Answer 7

1.operating activities are the core activities, the production and sale of products. They are manufacturing and non manufacturing operating activities 2.investing activities 3.financing activities

Question 8

Income statement

Answer 8

Record of profit/loss of the activity for the period of time under consideration

Question 9

Statement of changes in owners’ equity

Answer 9

Changes occured in the components of owners’ equity during a period of time. It is paid-in capital (the amount invested by the owners, common stock+additional paid in capital) and retained earnings (the portion of income retained for use in the business, r.e. at the beginning of the period - dividends + net income)

Question 10

Dividends

Answer 10

Distribution of earnings to the owners

Question 11

Statement of cash flows

Answer 11

identifies sources and uses of cash for a period of time, starting from net income. It is based on cash principle. It is adjusted through reconciling items: add depreciation and accounts payable, subtract inventory and accounts receivable

Question 12

Accrual principle

Answer 12

Revenues are reccognized when earned: when the product/service is delivered ot there’s the legal passage of ownership. Expenses are recognized when they are incurred

Question 13

Matching principle

Answer 13

The expenses for making a good (manufacturing costs) are registered when the good is sold, while non man. costs are registered when incurred

Question 14

The double entry principle

Answer 14

Each transaction must affect at least two accounts

Question 15

Bookkeeping procedure

Answer 15

Transactions daily reccorded in the journal, then posted in T-accounts in the ledger, then information is used to prepare financial statements

Question 16

Adjustments

Answer 16

Made to respect the accrual principle and record revenues and expenses in the appropriate fiscal period. Needed when a transaction affects more than one fiscal period. After the appropriate adjustments we have the adjusted trial balance

Question 17

Accruals of revenues or expenses

Answer 17

Cash transaction will happen after the current fiscal period but we want to recognize the revenue/expense.

Question 18

reclassification of expenses/revenues

Answer 18

Huge cash transaction that affects different fiscal periods and must be divided up among them; cash has already been paid/received

Question 19

ROI

Answer 19

Ratio to measure profitability. It expresses the rate of return the company was able to earn on the assets it had available during the year. It can be divided into margin and turnover.

Question 20

Margin

Answer 20

It is the profitability from sales, the amount of profit from each dollar of sales

Question 21

Turnover

Answer 21

It is the utilization efficiency, the efficiency of assets in generating revenues

Question 22

ROE

Answer 22

It expresses the rate of return the company was able to earn from the amount invested. It is higher than ROI

Question 23

Liquidity

Answer 23

Ability to pay current obligation, measured by 1.working capital 2.current ratio 3.acid-test ratio

Question 24

Debt ratios

Answer 24

Express the extent to which an activity finances its operation through debt

Question 25

Debt ratio

Answer 25

% of assets provided by creditors, lower than 0,5. It is the % provided by creditors for each dollar of assets

Question 26

Debt equity ratio

Answer 26

relative proportion of contributions from creditors and owners, below 1. It is the cents of asset provided by creditors for each dollar provided by owners