LE 1

Question 1

Define revenue recognition

Answer 1

The principle that businesses recognize revenue when it is earned:
1. reasonable justification that cash will be received
2. goods are delivered, services are performed

Question 2

Define the measurement principles of Historical Cost and Fair Value

Answer 2

Historical Cost is the record value of assets at their cost price, not taking into consideration depreciation

Fair value principle is the price received when selling it

Question 3

What is time period assumption?

Answer 3

The artificial time period in which economic life is divided into

Question 4

Define accrual vs cash basis accounting

Answer 4

Accrual: recording transactions that change a company’s financial statements in the Period they occur (revenue when earned not when cash is received, expense not when cash is paid)

Cash basis: recording transactions when receiving/paying cash

Question 5

Leverage ratios formulae

Answer 5

1. Debt ratio = total liability/total asset (these are the total assets funded by your liability)
2. Debt to equity ratio = total liability/total equity

Question 6

Liquidity ratios formulae

Answer 6

Current ratio = current asset/current liability

Quick ratio = (cash + marketable securities + accounts receivable)/current liabilities

*marketable securities are traded current assets that can quickly be turned into cash, such as common stock, commercial paper and money market instruments

Question 7

List the 9 steps of the accounting cycle

Answer 7

1. Analyse business transactions
2. Journalize the transactions
3. Post to ledger accounts
4. Prepare trial balance
5. Journalize and post adjusting entries (accruals and deferrals)
6. Prepare an adjusted trial balance
7. Prepare financial statements
8. Journalize and post post closing entries
9. Prepare a post closing trial balance

Question 8

The accounting equation (simplify equity)

Answer 8

Assets = Liabilities + (Owner’s Investments - Owner’s Drawings + Revenues - eXPENSES)

Question 9

What is accounting?

Answer 9

Basically the process of identifying the economic transactions relevant to the business, recording these transactions, and communicating this information through financial statements to relevant internal and external stakeholders

Question 10

Define internal and external stakeholders

Answer 10

Internal - decision makers inside the company/economic entity, is reported to using managerial accounting

External - stakeholders outside the company who need accounting data before making decisions which will affect the company, is reported to using financial accounting

Question 11

What are the understated/overstated accounts if unearned revenue and prepaid revenue go unrecorded

Answer 11

unearned revenue: liabilities understated, revenue overstated

prepaid revenue: assets overstated, expenses understated

Question 12

What are the understated/overstated accounts if accrued revenue and accrued expenses go unrecorded

Answer 12

accrued revenue: understated revenue, understated asset

accrued expense: understated equity/expense, understated liability