Lesson 2 & 3 (Transaction Analysis)

Question 1

What is Accrual Accounting based on?

Answer 1

GAAP (Generally Accepted Accounting Principles)

Question 2

The two foundation accounting principles as it relates to according transactions are?

Answer 2

Realization principle & Matching concept

Question 3

The Realization Principle states?

Answer 3

when revenues should be recorded

Question 4

What do you do when the earnings process is complete or virtually complete?

Answer 4

Record revenue

Question 5

What do you do when There is reasonable certainty as to the collectibility of the asset to be received (usually cash)?

Answer 5

Record Revenue

Question 6

The earnings process is considered complete when ?

Answer 6

When goods are sold or when services are performed

Question 7

What is this a key point of?
It is not necessary to recieve cash in order to record revenue (i.e., sell goods to a customer who agrees to pay in the following month).

Answer 7

Key point of Realization Principle

Question 8

What is this a key point of?
The receipt of cash does not always indicate that a revenue has been earned (i.e., a customer pays in advance for a service that will be performed later).

Answer 8

Key point of Realization Principle

Question 9

What is this a key point of?
Record revenue independent of the exchange of cash.

Answer 9

Key point of Realization principle

Question 10

What is this a key principle of ?
It is required that the receipt of cash be relatively assured in order to record revenue

Answer 10

Key point of Realization principle

Question 11

The Realization principle states that you should recognize revenue when ?

Answer 11

When the product or service has been delivered to the customer and cash has been received or a receivable has been generated that has reasonable assurance of collectibility

Question 12

The matching concept tells us ?

Answer 12

When we should record expenses

Question 13

Record Expenses in ?

Answer 13

In the same accounting period that the related revenue is earned

Question 14

The determining factor in the timing of recording expenses is the

Answer 14

generation of revenue and not the payment of cash

Question 15

For most expenses, it is difficult to trace to a specific revenue so they are recorded when ?

Answer 15

When they are incurred

Question 16

Cash accounting does not follow ?

Answer 16

GAAP

Question 17

Record revenues when ?

Answer 17

Cash is received & Cash is paid

Question 18

Accrual accounting must be used by all companies who sell ?

Answer 18

Securities(stock) to the public

Question 19

Cash accounting can be used by any company who does not sell ?

Answer 19

Stock to the public
(also used by individuals to account for their personal finances)

Question 20

If a company who does not sell stock to the public attempts to get a bank loan, they are typically required to present ?

Answer 20

Their financial statements using accrual accounting
(this is typically required bc cash accounting can be easily manipulated and thus leading to misleading financial statements)

Question 21

Account definition ?

Answer 21

Place where all increases and decreases in financial statements items are recorded

Question 22

We use what to analyze these accounts ?

Answer 22

T-account

Question 23

Account name goes where on the T-account ?

Answer 23

The top (heading)

Question 24

Debit goes where on the T-account ?

Answer 24

Left side

Question 25

Credit goes where on the T-account ?

Answer 25

Right side

Question 26

If debits are greater than credits, the account will have a ?

Answer 26

Debit balance

Question 27

If credits are greater than debits, the account will have a ?

Answer 27

Credit balance

Question 28

Increases for Asset & Expense will be on the ?

Answer 28

Debit side of account

Question 29

Increase of Liability, Equity, & Revenue will be on the ?

Answer 29

Credit side of the account

Question 30

Normal balance of an account is the same as what ?

Answer 30

Increases the account

Question 31

What Are economic events that require recording in the financial statements ?

Answer 31

Accounting transactions

Question 32

Transactions are recorded in the financial statements because they result in a change to ?

Answer 32

Assets, liabilities, and/or equity accounts

Question 33

All accounts of the company taken together is a ?

Answer 33

Ledger (think of ledger as all the T-accounts of the company)

Question 34

The place where all accounting transactions are initially recorded is a ?

Answer 34

Journal

Question 35

The means used to record transactions in the journal is the ?

Answer 35

Journal Entry

Question 36

I’m every Journal entry what must happen ?

Answer 36

The debits = credits

Question 37

Every transaction must be recorded with at least one debit and at least one credit with the total dollar debits always equaling the total dollar credits is what ?

Answer 37

Double-entry accounting

Question 38

The process of transferring debit and credit amounts from the journal to the ledger (i.e., transferring the amount i. the journal entries to the T-accounts is what ?

Answer 38

Postinf

Question 39

Posting to the t-account allows us to ?

Answer 39

Determine the ending balance in each account (something that would be very difficult to do by just looking at journal entries)

Question 40

I’m each entry you must have ?

Answer 40

at least one credit and at least one debit

Question 41

The process of identifying the specific effects of economic events on the accounting elements is what ?

Answer 41

Analyzing transactions

Question 42

What is recorded when you sell an asset other than inventory for more than its costs ?

Answer 42

A Gain

Question 43

selling price - cost = ?

Answer 43

Gain

Question 44

A gain is classified as a ?

Answer 44

Revenue account

Question 45

What is recorded when you sell an asset other than inventory for less than its costs ?

Answer 45

A Loss

Question 46

cost - selling price = ?

Answer 46

The Loss

Question 47

A loss is classified as an ?

Answer 47

Expense account

Question 48

What type of account is dividends ?

Answer 48

contra equity account (since it reduces equity)

Question 49

What equity account does dividends reduce ?

Answer 49

retained earnings

Question 50

Decreases on Assets and Expenses will be on what side ?

Answer 50

Credit side of the account

Question 51

Decreases for Liability, Equity, & Revenue go on what side ?

Answer 51

Debit side of the account

Question 52

What are these the basic steps of ? 1. Record transactions in the journal (use journal entries) 2. Post debit and credit amounts from the journal to the ledger (done to determine ending balance in each account). 3. Prepare a trial balance

Answer 52

The Accounting Cycle

Question 53

What is a list of accounts and their balances at a given time ?

Answer 53

Trial balance

Question 54

What is the primary purpose of a trial balance ?

Answer 54

Price debits = credits after posting

Question 55

What involves the examination of both the relationships among financial statement numbers and the trends in those numbers over time ?

Answer 55

Financial Statement Analysis

Question 56

What are these the purposes of ? 1. Use the past performances of a company to predict how it will do in the future 2. Evaluate the performance of a company with an eye toward identifying problem areas

Answer 56

Purposes of financial statement analysis

Question 57

What are relationships between financial statement amounts ?

Answer 57

Financial ratios

Question 58

Radio said user in decide if whether to ?

Answer 58

Invest in, or loan money to a company

Question 59

A single ratio by itself is not very ?

Answer 59

meaningful

Question 60

What are these examples of ? 1. Other companies that operate in the san industry (i.e., competitors) 2. Industry averages 3. Past years (trend analysis)

Answer 60

Typical benchmarks or comparison points

Question 61

All of these ratios are referred to as ? 1. Workimg capital 2. Current ratio 3. Acid-test ratio

Answer 61

Liquidity ratios

Question 62

What measures the short-term ability of the company to pay its debts as they come due ?

Answer 62

Liquidity ratios

Question 63

Liquidity ratios are meant for ?

Answer 63

Short term creditors such as bankers and suppliers

Question 64

Current assets - Current liabilities = ?

Answer 64

Working capital

Question 65

Current assets / Current liabilities = ?

Answer 65

Current ratios

Question 66

Working capital and current ratio both give a user a feel for the ?

Answer 66

Companies ability to pay its debts as they come due (working capital in form of a dollar amount and current ratio in the form of number of times)

Question 67

(Cash + Accounts Receivable) / Current liabilities = ?

Answer 67

Acid-test ratio

Question 68

What does the same as current ratio but more conservative estimate of the company’s liquidity by using only the most liquid current assets in the numerator.

Answer 68

Acid-test ratio

Question 69

The acid-test ratio is also known as the ?

Answer 69

Quick ratio