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Cards in this deck (40)
- 1What is the accounting equation?Assets = Liabilities + Owners' Equity
- 2Cash received from a bank loan - asset or liability?While the loan represents a liability, the cash itself is an asset because it is a resource that will provide future benefit to the business.
- 3Differentiate between revenue and asset.Suppose Cardullo's sells a package of Turkish delight to a customer. The value of the money received from the customer is considered revenue. Note that revenue is not an asset. The cash received from the customer is an asset, while the revenue represents an increase in owners' equity.
- 4A business can fund its resources, or assets, through three different sources. Name them.A business can fund its resources, or assets, through three different sources.
The first source is borrowings, which is liabilities.
The second source is contributed capital, which is owners’ equity.
The third source is by successfully generating a profit. Any profit generated by the business belongs to the owners of the business and could either be distributed to the owners through dividends or be reinvested in the business through the retained earnings account. - 5What is the Matching Principle?The matching principle requires that a company match its expenses to the related revenues in the accounting period to which they relate. This means that when Cardullo’s sells a package of Turkish Delight, it records both the revenue from the sale and the expense associated with the sale (the cost of purchasing inventory) in the same accounting period, when the Turkish Delight is sold.
- 6Should Cardullo's recognize revenue when the customer walks out the door with the product, or when payment is ultimately received?Should Cardullo's recognize revenue when the customer walks out the door with the product, or when payment is ultimately received?
The answer to this question depends on which method of accounting Cardullo's uses. The two primary methods of accounting are cash and accrual. The cash method is simple and straightforward. Transactions are recorded, and cash changes hands. This method is used only by the smallest of businesses. In this course, however, we will focus on the accrual method of accounting, which is what almost all companies use. Under this method, the correct answer is that revenue is recognized when the merchandise is delivered. - 7What is the Realization Principle?Under accrual accounting, we recognize revenues when they're earned and realizable, not necessarily when we receive the cash. This is known as the Realization Principle. It simply means that if the business has performed the work, and it can reasonably expect to receive cash from the customer, it can recognize revenue, even though it hasn't yet received the cash. In other words, revenue is realizable. If a business has doubts about the customer's ability to pay, or services were performed or merchandise delivered that the customer hasn't agreed to pay for, then you should not recognize revenue until cash collection is more certain. Cardullo's should recognize revenues when merchandise is delivered to the Society of Fellows, because payment is highly certain.
- 8What is the Matching Principle?Essentially, expenses should be recognized in the same period in which the revenues that they helped generate are recognized. Since revenues are generally recognized when inventory is sold, expenses for inventory are recognized at that time as well.
This is known as the Matching Principle. Later, when cash is actually received from the sale, two adjustments are made to assets.
First, assets are increased due to the receipt of cash. Second, assets are decreased, because the business no longer has the right to receive cash from the customer. The cash account increases, and the receivables account decreases.
The net effect is that there is no change in either overall assets or owners' equity. - 9What is the purpose of accounting standards?Accounting standards create guidelines and rules so that different companies record similar transactions in a similar way. This is the fundamental purpose behind accounting standards, and these principles provide meaningful and reliable information to users of financial reports.
- 10What is the difference between FASB and GAAP and IASB and IFRS?In the United States, the standards for public companies come from the Financial Accounting Standards Board, or FASB. The set of standards followed by most U.S. companies is referred to as
Generally Accepted Accounting Principles, or GAAP. You'll hear this acronym, GAAP, often in accounting, and we'll use it throughout this course to refer to the way things are done in the U.S. The biggest standard-setting body outside the United States is the International Accounting Standards Board, or IASB. And the set of standards they issue is referred to as International Financial Reporting Standards, or IFRS.
Although in most cases, the standards issued by the FASB and the IASB are quite similar, there are some differences. - 11Discuss the principle of conservatism as it relates to accountingConservatism is meant to keep business managers from using their discretion
to report overly favorable financial results.
Accounting standards will generally require
that businesses choose measurement methods that anticipate and record future losses, but don't anticipate and record future gains.
This results in lower net income, assets and stockholders' equity. Conservative accounting numbers are less likely to be overly inflated or optimistic and mislead those using the financial information. - 12Discuss the principle of historical costThe historical cost principle is a good example of how accounting standards require that reliable information be used to record transactions.
This concept refers to the fact that transactions are recorded at the actual price that existed at the time of the transaction.
This number tends to be more reliable
because it tracks back to the actual amount that changed hands. - 13What is consistency in accounting?The concept of doing things in the same way from one period to the next is known as consistency.
- 14What is materiality in accounting?Another important concept in accounting is materiality. Materiality states that trivial matters don't have to be recorded or reported in detail in the financial statements of the business.
Something is considered to be material if it's reasonably likely to impact the decision making of those who are using the accounting data or the financial reports. Businesses are only required to do detailed record keeping and reporting for items that are material. - 15What is the entity concept in accounting?The entity concept refers to the fact that a business is a separately identifiable entity. So basically it means that only the business that belongs to the business should be reported in the financial statement of a firm.
- 16Explain money measurement in accountingThe money measurement principle refers to the fact that only values that can be measured in monetary terms get recorded in the financial statements. This principle is closely related to the need for reliability, covered previously, as well as the historical cost principle.
Events or circumstances that could have a financial impact on your business are not recorded in the accounts unless they can be reliably measured in monetary terms and they relate to an actual historical transaction that has occurred. - 17Discuss the concept of going concern in accountingThe going concern refers to the fact
that the business will continue to operate in the foreseeable future. Assets will continue to be used for the purpose that they were initially acquired and liabilities will continue to be settled.
Businesses are usually considered to be a going concern unless you have significant evidence that suggests otherwise. If you take it to the extreme, the going concern is what allows us to do accruals accounting. Unless you have reasonable certainty that the business will continue to operate, the assets will not have any future values. Also, liabilities will not be settled. So this concept allows accountants to make estimates and generate financial statements under the assumption that the business is a going concern. - 18What conditions must be met for an item to be termed an asset?These standards state that to be considered an asset, an item must:
1. Be purchased at a cost that is measurable
2. Produce probable economic benefit in the future
3. Result from a past event
4. Be owned or controlled by the entity - 19What conditions must a liability satisfy?Generally, a liability must satisfy the following:
1. It must impose a probable economic obligation on economic resources in the future
2. The obligation has to be to another entity
3. The event that created the obligation must have occurred in the past - 20All revenues and expenses, and therefore Net Income, are part of the owners' equity of the business. True or False?True
- 21What is equity?n other words: Owners’ Equity = Assets - Liabilities
In essence, equity is simply the resources of the business that belong to the owners. If you add up all of the resources of the business (assets), and subtract all of the claims that third parties (such as lenders and suppliers) have against those assets, you’ll end up with what is left for the owners (equity). - 22______ is “the money that a business receives from providing goods or services to a customer.”Revenue.
One important difference, however, is the stipulation that the goods or services must be related to the entity’s central operations. If a machine tool company sells a building that it no longer uses, the funds received from the sale are not considered revenue because they are not related to the primary business of the company. - 23______ is “the costs associated with providing goods or services to a customer.”Expenses
- 24What is the accrual method of accounting?Most companies use the accrual method of accounting, which means that transactions are recorded in the period to which they relate, regardless of when cash is exchanged.
- 25Mention some of the guiding principles of accountingAccounting is governed by principles and rules. Some of the guiding principles are conservatism, relevance vs. reliability, historical cost, consistency, materiality, the entity concept, money measurement, and going concern.
- 26What are the various parts of the recording process?Each transaction is recorded in the company’s financial records in what is known as the recording process, outlined in this diagram:
- 27The list of all the accounts is called ____Chart of Accounts
The accounts and naming can vary from business to business. In fact, each business is free to determine what accounts will be needed to best capture the activities of their business.
The list of all these accounts is called their chart of accounts. - 28Familiarize yourself with some common accounts:
- 29All revenues and expenses are considered part of owners' equity: True or False?True
Revenues increase owners' equity while expenses decrease owners' equity.
Therefore, revenues increase with a credit and decrease with a debit, the same as owners' equity.
On the other hand, expenses increase with a debit and decrease with a credit, the opposite of owners' equity. - 30What do credits and debits really mean?For our purposes, debits mean left, and credits mean right. Debits go in the left column, and credits go in the right column of journal entries, T-accounts, and trial balances. It really is just that simple. The terms do not mean increase or decrease, they do not mean good or bad. They simply mean left and right. This is simply an accounting rule based on a historical convention.
- 31What are some things to remember about journal entries?Some things to remember about Journal Entries:
1. Every journal entry has one line for each account affected
2. There are always at least two accounts affected
3. The total of all debits must equal the total of all credits
4. Journal entries are generally formatted with the debits first, then credits
5. Each journal entry has a date associated with the entry - 32Suppose your company receives a large order from your best customer. Should this be treated as revenue and recorded on your company's books?No.
To recognize revenue, the company must have delivered the product or performed the service. Since this is just an order, it is not yet a transaction to be recorded. No service or product has been delivered yet, so no revenue is recognized. - 33What are some things to remember about T-accounts?Some things to remember about T-Accounts:
1. There is a separate T-Account for each account, such as Cash or Accounts Receivable
2. Every T-account has a beginning and an ending balance, though the balance may be zero
3. A T-account covers activity for a period of time, for example, the month of January or the year 2014
4. Every transaction will affect at least two T-accounts
5. If you add the ending balances of all T-accounts, the total of all debits must equal the total of all credits - 34What is the difference btw cash and accrual methods of accounting?Under the cash method of accounting, transactions are recorded when cash is exchanged, whereas under the accrual method of accounting, transactions are recorded in the accounting period to which they relate, regardless of when cash is exchanged.
For example, when a business sells goods to a customer on account, the business records that transaction at the time of the sale, even though they may not receive the actual payment until 30 days later. As a general term, any such transaction can be called an ‘accrual’. - 35What is unearned revenue or deferred revenue?When selling goods or services, it is common to receive payments in advance from customers. We have seen that this increases our assets, namely cash,
and liabilities-- that is, the obligation to provide services. The specific account we use to record the liability is called "unearned revenue" or "deferred revenue." - 36Deferred revenue is not a revenue account but a liability account. True or False?Remember that at first glance the Deferred Revenue account can be a bit confusing. Even though it has the word ‘revenue’ as part of its name, it is not a revenue account. Deferred revenue (also sometimes referred to as unearned revenue) is a liability account. It represents the obligation to provide goods or services that has not yet been fulfilled. Thus, the revenue is deferred, or not yet earned, but at some future date when the goods or services are provided, the liability will be converted into revenue.
- 37Give an example of deferred revenue.Suppose Cardullo's sells a customer a gift card for $100. This gift card transaction is an example of deferred revenue.
Cardullo's has received the $100 from the customer,but Cardullo's has not yet earned the revenue for the sale because the store still has the obligation to provide $100 worth of goods in the future when the customer returns and redeems the gift card. - 38Prepaid expense is not an expense account. Discuss.Similar to Deferred Revenue, the Prepaid Expense account can be confusing at first glance. Even though it has the word ‘expense’ as part of its account name, it is not an expense account. Prepaid Expense is an asset account. It represents an amount that has been prepaid by the business, and thus the business now has the right to receive goods or services in the future. Prepaid expense will be converted into an expense at a later date, when the goods or services are provided. This, again, is an example of accrual accounting and the matching principle.
- 39The first step in producing financial statements is to prepare a _______The first step in producing financial statements is to prepare a trial balance.
This is simply a list of all the business's accounts that are balances of the debt and the amount in each account.
Since debits always equal credits for each journal entry and every journal entry is posted to T accounts, it follows then that the total of all the debit balance accounts
should equal the total of all the credit balance accounts in the trial balance. - 40Research and Development account is an expense account. True of FalseTrue
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- Business/Economics Flashcards on FA, created by Sola So on 05/08/2016.
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