Module 3

Question 1

What is accrual accounting?

Answer 1

Accrual accounting refers to the recognition of revenue when earned(even if not received in cash) and the matching of expenses when incurred(even if not paid in cash)

Question 2

What are accrual accounting’s 2 guiding principles?

Answer 2

1- revenue recognition
2- matching principle

Question 3

What are the 4 main financial statements?

Answer 3

1- statement of cash flows
2- statement of financial position
3- statement of changes in shareholders’ equity
4-statement of income and statement of comprehensive income

Question 4

Describe the statement of financial position (balance sheet).

Answer 4

1- Mirrors the Accounting Equation: * Assets = Liabilities + Equity
2- Uses of funds = Sources of funds
3- Assets are listed in order of liquidity
4- Liabilities are listed in order of maturity
5- Equity consists of contributed capital and retained earnings
5-The only financial statement which applies to a single point of time of a business’s calendar yea

Question 5

Definition of assets:

Answer 5

Must be owned or controlled by the company and must possess expected future benefits

Question 6

name and describe the 2 types of assets.

Answer 6

1- Current: can be converted to cash within a year
2- non-current: can easily be converted to cash within a year

Question 7

name and describe the 2 types of liabilities.

Answer 7

1- Current: come dues in less than a year
2- non-current: come due after a year

Question 8

Describe the statement of comprehensive income (profit and loss):

Answer 8

net sales-expenses= net income

Question 9

Describe the statement of shareholders equity.

Answer 9

Contributed capital and the Statement of Equity is a reconciliation of the beginning and ending balances of stockholders’ equity accounts.*
Main equity categories are:* Retained earnings* Treasury stock

Question 10

Describe the statement of cash flows:

Answer 10

Reports cash flows by three types of activities:
1.Cash flows from operating activities–transactions that affect net income.
2.Cash flows from investing activities–transactions that affect noncurrent assets.
3.Cash flows from financing activities–transactions that affect equity and debt of the entity.