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21 Cards in this Set

  • Front
  • Back
- 1.Describe the 3 primary forms of business organization
- Proprietorship; business owned by one person
- Partnership; business owned by 2 or more people
- Corporation; separate legal entity whose shares provide evidence of ownership
- 2. Who are the 2 main users of accounting
- Internal users; managers who plan, organize and run business.
- External users; Investors and creditors
- 3.Explain the 3 principal types of business activities.
- Financing; collecting the necessary funds
- Investing; acquiring the resources necessary to run the business
- Operating; involve putting the resources of the business into action to generate profit.
- 4. Describe the content and purpose of each of the financial statement
- Statement of Earning; present Revenues and Expenses of a company for a specific period of time.

- Statement of Retained Earning; Summarizes the change in Retained earnings that have occurred for a specific period of time.

- Retained Earning are cumulative earnings over the company’s life, less any dividends

- Balance sheet; Report assets, liabilities and shareholders equity of a business at a specific date.

- Cash flow statement; Summarizes information concerning cash inflow for a specific period of time.
- 5. Explain the basic accounting equation
- Asset are resources owned by the business
- Liabilities are debt and obligations of the business
- Shareholder Equity represents the claims of the shareholders on the assets of the business.
- 6. The preparation of financial statement relies on 4 basic assumptions; What are they?
- Monetary Unit Assumption; requires that only transaction data capable of being expressed in terms of money be included in the accounting records of the economics entity.
- Economic Entity Assumption; Every economic entity can be separately identified and accounted for.
- Time Period Assumption; Economic life of a business can be divided into artificial time periods.
- Going concern Assumption; A business will continue operating long enough to carry out its existing objectives
- 1. What is the objective of financial reporting?
- It’s to provide useful information for decision making
- 2. What are the qualitative characteristics of accounting information?
- Understandability
- Relevance
- Reliability
- Comparability and Consistency
- 3. Identify the 2 constraint of accounting.
- Cost Benefits; value of information exceeds the cost of providing it.
- Materiality; An item is material when it’s likely to influence the decision of an investor or creditor.
- 4. Name 2 examples of profitability ratios and explain how to calculate them.
- Earning per share ratio is net dividend minus preferred dividends divided by average number of common share.
- Price earning ratio is market price per share divided by Earning per share.
- 5. Explain the relationship between a statement of retained earnings, a statement of earnings and a balance sheet.
- Statement of retained earnings presents the factors that have changed to the retained earnings balance during the period.
- These include the net earning (or loss) balance reported in more details on the statement of earnings and any dividends paid to shareholders during the period.
- The ending balance of retained earnings is reported in the shareholders equity section of the balance sheet.
- 6. Name 3 ratios used to analyze a company’s liquidity
- Working capital; is current assets minus current liabilities
- Current Ratio; current assets divided by current liabilities
- Cash current debt coverage; Cash provided by operating activities divided by average current liabilities.
- 7. Name 2 ratios used to analyze a company’s solvency
- Debt to total assets ratio; Total liabilities divided total assets
- Cash total debt coverage; Cash provided by operating activities divided by average total liabilities.
- 1. What is the effect of business transactions on the basic accounting equation?
- Each business transaction must have a dual effect on the accounting equation
- 2. What is an Account?
- It’s an individual accounting record of increases and decreases in specific asset, liabilities and shareholders equity items.
- 3. Define debit and Credits and explain how they are used to record business transactions.
- The term debit and credit are synonymous with left and right.
- Assets, dividends and expenses are increased by debits and decreased by credits.
- Liabilities, common shares, retained earnings, and revenues are increased by credits and decreased by debits.
- 4. Identify the basic steps in the recording process.
- Analyze each transaction in terms of it’s effect on the account
- Enter the transaction information in a general journal
- Transfer journal information to the appropriate accounts in the general ledgers.
- 5. Explain what a journal is and how it helps in the recording process.
- It discloses the complete effect of a transaction in one place
- Provides a chronological records of transactions
- Prevent or helps locate errors
- 6. Explain what a ledger is and how it helps in the recording process.
- Entire groups of accounts maintain by a company is referred to as a general ledger.
- It keeps all the information about changes in specific account balances in one place.
- 7. Explain what posting is and how it helps in the recording process.
- It’s the procedure of transferring journal entries to the general ledger accounts.
- 8. Explain the purpose of a trial balance
- It’s a list of accounts and their balances at a given time.
- The primary objective of a trial balance is to prove the mathematical equality of debits and credits.