Recap Year 1

Question 1

3 steps in the accounting process

Answer 1

to account/to count/ to be accountable

Question 2

2 key missions

Answer 2

• Facilitate value creation by supporting decision-making
• Facilitate stewardship

Question 3

Purpose of financial accounting

Answer 3

is to provide financial information about a company to investors,
lenders and other creditors in order to facilitate their investment/lending decisions

Question 4

“information” and “agency” problems

Answer 4

• Separation of ownership and control of the company
  ‒ Shareholders are the owners (principals)
  ‒ But senior managers (CEO, CFO, …) are the ones making the
  business decisions on behalf of shareholders (agents)

Question 5

Adverse selection

Answer 5

managers (insiders) know more about the
quality of their company and its future prospects than outside
shareholders

Question 6

Moral hazard

Answer 6

managers have incentives to use invested
resources for their own benefit instead of for the benefit of the
company

Question 7

what are the 5 principal financial statements?

Answer 7

• Statement of comprehensive income (or income statement)
• Statement of changes in shareholders’ equity
• Statement of financial position (or balance sheet)
• Statement of cash flows (or cash flow statement)
• Notes to the financial statements

Question 8

Income statement equation

Answer 8

Profit / Loss (Net Income) = Revenues – Expenses

Question 9

Goal of income statement

Answer 9

• Provides information on change in stockholders’ equity
  resulting from a firm’s business activities from
  transactions other than financing transactions with
  owners during the reporting period (flows measure)
• Value increments and decrements are broadly classified
  as revenues and expenses, respectively

Question 10

2 types of income statement

Answer 10

• Statement of Profit or Loss (from primary performance activities)
• Statement of Other Comprehensive Income (from other
  performance activities)

Question 11

Goal of the shareholders equity

Answer 11

provides a
reconciliation of the changes in book value of equity
during the reporting period.

Question 12

The statement of changes in equity can be written as a
stocks and flows equation:

Answer 12

Ending Equity = Beginning equity+ total (comprehensive) income
– net payout to shareholders

Question 13

2 types of changes in Equity

Answer 13

• Owners transactions (dividends etc.).
• Non-owner Transactions (P&L, OCI)

Question 14

The goal of the balance sheet

Answer 14

” depicts a firm’s investments in
assets and the claims to these investments, liabilities
and equity.

Question 15

Balance sheet equation

Answer 15

Shareholders’ Equity = Assets – Liabilities

Question 16

The goal of the cash flow statement

Answer 16

informs about the generation
and spending of cash resources during the reporting
period

Question 17

change in cash equation

Answer 17

Change in cash = Cash from operations + cash from
investments + cash from financing

Question 18

Goal of notes

Answer 18

Financial statements as highly aggregated summary
depictions of the entity’s performance and financial
position

Question 19

matching principle

Answer 19

‒ Expenses follow revenues
‒ Expenses are recognized when corresponding revenue is
generated, not when cash flows out of the firm

Question 20

2 types of ACCRUALS

Answer 20

• Deferrals
• Accruals

Question 21

2 types of deferrals

Answer 21

=> cash before service
- prepaid expenses (expenses paid in cash and recorded as assets before they are used).
- Unearned revenues (revenues received in cash and recorder as liabilities before they are earned)/

Question 22

2 types accruals

Answer 22

=> service before cash.
- Accrued revenues (revenues earned but not received yet).
- Accrued expenses (expenses incurred but not paid yet).

Question 23

Accrual revenue

Answer 23

account receivable

Question 24

Accrual expense

Answer 24

account payable

Question 25

deferral revenue

Answer 25

unearned revenue

Question 26

deferral expense

Answer 26

pre-paid account

Question 27

how to record the sale of equipment

Answer 27

use:
- cash
-accumulated depreciation
- plant DE
- Gain (loss) on the sale of long term assets

Question 28

how to record depreciation expense

Answer 28

• debit : depreciation expense
• credit acc. depreciation
• amount : the difference between accumulated depreciation last year and this year + the amount “gained” from the sale of the asset.

Question 29

entry to record revenue recognized in 2015

Answer 29

• cash
• revenue
• unearned revenue
• acc. receivable

Question 30

journal entry to record the collection of customers indebtness in 2015

Answer 30

• debit cash
• credit account receivable
• amount: x = difference in account receivable between 2015 and 2014 + what was sold on account in 2015.

Question 31

record the prepayment for the delivery scheduled in jan

Answer 31

• debit cash
• credit unearned revenue

Question 32

record purchase of inventory (if on account)

Answer 32

• debit: inventories
• credit acc. payable

Question 33

record sale of inventory

Answer 33

• debit COGS
• credit inventory

Question 34

record movements in prepaid expense

Answer 34

• debit: prepaid expense
• debit: operating expenses
  -credit cash