FInancial accounting cours 2

Question 1

What are the five main business entities?

Answer 1

• Non-profit organizations
• Personal business entity
• Partnership
• The joint stock company
• Cooperative

Question 2

What is an accounting principle?

Answer 2

It’s a set of rules which is a result of discussion and analysis of the financial statement.

Question 3

What is the going concern assumption?

Answer 3

It is assumed that the business will continue in operation for the foreseeable future.

Question 4

What is the accounting principle of the business entity concept?

Answer 4

The company is a separate entity from its owners; therefore the company’s activities
must be separated from the activities of its owners.

Question 5

What is the accounting principle of monetary unit assumption?

Answer 5

Inflation is not taken into account in the preparation of financial statements.

Question 6

What is the accounting principle of Time period or Separation of accounting periods?

Answer 6

The effect of the transaction is recorded and presented in the financial statements of the period to which it relates. Accounting periods must be independent of one another.

Question 7

What is the accounting principle of accrual accounting?

Answer 7

Transactions are accounted for when they occur, which is not necessarily when the
corresponding cash movement takes place (≠ cash accounting).

Question 8

What is the accounting principle of relevance?

Answer 8

To be useful, information must have the ability to influence the decisions of a user of the financial statements.

Question 9

What is the accounting principle of faithful representation?

Answer 9

To be useful, the information gives an accurate description of the transactions or other events. This implies that the information must be complete, neutral, or free from error.

Question 10

What is the accounting principle of comparability?

Answer 10

Users should be able to compare the financial statements of an entity over time and to other entities. Therefore, accounting methods should be consistent from one period to
another.

Question 11

What is the accounting principle of verifiability?

Answer 11

Knowledgeable and independent observers could reach a consensus that a particular depiction is a faithful representation.

Question 12

What is the accounting principle of timeliness?

Answer 12

Information should be available to decision-makers in time to be capable of influencing their decisions.

Question 13

What is free from error information?

Answer 13

There are no errors or omissions in the financial information produced, although inaccuracies can ultimately arise, particularly when making estimates.

Question 14

What is the accounting principle of understandability?

Answer 14

Information should be understandable by users (assumed to have a reasonable knowledge of business and economic activities).

Question 15

What is the accounting principle of pre-eminence of substance over form?

Answer 15

In assessing whether an item meets the definition of an asset, liability, or equity, attention must be paid to the underlying substance and economic reality, not just the legal form.

Question 16

What is the accounting principle of cost constraint?

Answer 16

The costs imposed by reporting information should be justified by the benefits of reporting that information.

Question 17

What is the accounting principle of asset recognition?

Answer 17

Provides future economic benefits that will flow to the entity; Has a cost or value that can be measured reliably. (it can be a salary that will be paid in the future.)

Question 18

What is the accounting principle of liability recognition?

Answer 18

It is a present obligation of the entity to transfer an economic resource as a result of past events; The amount at which the settlement will take place can be measured reliably

Question 19

What is the accounting principle of product recognition?

Answer 19

• These are increases in economic benefits in the form of inflows or increases in assets or decreases in liabilities.
• Which gives rise to increases in equity (with the exception of contributions from the shareholders.)

Question 20

What is the accounting principle of charge recognition?

Answer 20

They are decreases in economic benefits in the form of outflows or decreases in assets or the occurrence of liabilities, which result in a decrease in equity (except for distributions to shareholders).

Question 21

What is the accounting principle of historical cost?

Answer 21

The amount of cash paid to acquire an asset at the time of its acquisition.

Question 22

What is the accounting principle of fair value?

Answer 22

The amount at which an asset could be exchanged between knowledgeable and willing parties in an arm’s length transaction.

Question 23

What is the fundamental identity?

Answer 23

• It is the foundation of the financial accounting process.
• To maintain equality, every transaction must be recorded by way of double entry.
• Maintain at all times the equality: Assets = Liabilities + equity.
• Recording transactions affect the fundamental identity through (at least) 2 impacts while maintaining equality.

Question 24

What is the extended form of the fundamental identity?

Answer 24

Assets = liabilities + Share Capital + Retained earnings (beginning) + revenues - expenses - Dividends

Question 25

What is the principle of the reporting period (periodicity)?

Answer 25

it is an assumption that the ongoing activities of a big company can be divided into monthly, quarterly, or annual periods.