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65 Cards in this Set
- Front
- Back
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What is the purpose of Accounting?
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Measure and communicate financial activities of an individual or business
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What is the role of the balance sheet?
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Record what we own vs what we owe
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What is the purpose of the income statement?
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Record revenue and expenses
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What revenue?
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An increase of net worth caused by providing goods or services in exchange for an asset, usually cash.
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What is an accounting period?
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The time frame in which the financial statements are prepared.
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What is an advantage of monthly accounting periods?
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Regular tracking of living expenses, frequently assessing realistic expectations, controlling errors effectively
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What happens at the end of anaccounting period?
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Income statement accounts are closed. Balance Sheets remain open and rollover net worth to be the opening amount for the next period.
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What is the difference between cash flow and accruals?
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Cash flow looks only at the amount of cash going in and out of an account. It is not directly connected to net worth. Accruals relate to net worth and do not necessarily connect to cash flow.
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What is cash–based accounting?
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Revenues and expenses are reported on the income statement in the period in which the cash is received or paid.
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What is Accrual based accounting?
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Revenues are reported in the income statement in the period in which they are earned.
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What is the effect on net worth of receiving a credit card bill?
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Decreases by the bill amount even if you don’t pay it right away.
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If you borrow $500 from the bank, what is the effect on your net worth?
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NO effect. Assets (cash) and Liabilities (loan) equal out.
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What is the effect on a net worth of paying interest on a loan?
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Reduces net worth because it does not reduce debt, but it does reduce cash (or an asset)
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What impact does buying or selling assets have on net worth?
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No impact. You use cash, but also gain capital.
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How does a prepaid expense effect networth?
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Initially no effect (if purchased with cash). Your assets increase when you buy it. However, as the asset is used, net worth will decrease. Ex|: prepaying 6 months of insurance decreases cash by $600, but you have the value of 6 months of insurance so net worth is the same. The next month, while you do not pay anything you lose the value of one month of insurance coverage because you used it.
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What is capital?
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Anything that increases your net worth which is not considered revenue.
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True or false: An expense always decreases net worth, even when it has not yet been paid.
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TRUE
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True or false: It is not possible for a person with less cash in their bank account to have a higher net worth than someone with more cash in their bank account.
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FALSE
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In September you get your car repaired,but you agree to pay the mechanic in October. When does your net worthdecrease?
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September
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True or False Borrowing money andrepaying debt results in changes to net worth.
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False
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True or false: Every balance sheettransaction must be associated with an income statement transaction.
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False
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True or false: An expense reducesnet worth.
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True
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What is the correct accountingequation?
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Assets = Liabilities + Net worth
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You win a lottery ticket and needto account for it. What are the correct entries?
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Increase cash and increase net worth
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True or false: to increase thecash account with a T–account entry the entry must be made on the right side.
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False
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True or false: Sam used $5000 ofhis savings to buy a used car. Since he spent all his cash savings, his networth decreased.
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False
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If you spend $1000 cash to pay your monthly rent bill, will this affect the income statement or the balance sheet?
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Both
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What is the equivalent of salaryearned by an individual in business accounting?
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The company’s sales
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What does accrual accounting mean?
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Revenue and expenses should be recognized in the period they occur regardless of when they a paid for.
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True or false: personal accounting is a system to identify, measure and communicate all financial activities of an individual.
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True
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Kevin paid $12000 on January 1stas rent for the next 12 months. How much did Kevin’s net worth decrease at theend of January?
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$1000
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What is an income statement usedfor?
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Recording changes to net worth.
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What is true when a company pays an expense?
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The expense must be recognized because it was incurred during this accounting period.
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AAA Company paid $10,000 cash for rent for 6 months. How should this transaction be recorded? (what T accounts are affected and how?)
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Increase prepaid rent; decrease cash
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Recognizing revenue refers to:
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Recording revenue in the accounting records
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What liability is generally listed first on a balance sheet?
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Accounts Payable
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What item is least likely to appear on the Income Statement of service businesses?
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Cost of Goods sold
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Which of the following is true when a company incurs an expanse that is to be paid later?
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The expense account should be increased along with accounts payable
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Which of the following is true when a customer pays for a service at the time it is provided?
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Revenue should be recognized when the service was provided.
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What is the formula to calculate ending owners equity balance?
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Beginning Owner's Equity + Owner's Contributions+ Net Income (loss) – Owner's withdrawals
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When preparing financial statements at the end of an accounting period, which one of the following statements should be prepared first?
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The income statement
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Computers and other assets that are expected to last for more than a year are referred to as:
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Property, plant and equipment
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In Buinessiness accounting, unpaid accounts is referred to as: |
Accounts payable |
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What is the net worth referred to as in the context of a business? |
owners equity |
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What is the correct order for the balance sheet of a business for the following liabilities: Bank Loan, Mortgage Payable, Accounts Payable |
Accounts Payable, Bank Loan, Mortgage Payable. |
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Which type of business is most likely to have raw materials inventory? |
Manufacturing business |
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In January a company receives cash deposit from a customer for a service that will be performed and completed in February. Which of the following is true? |
Liability increases in January. |
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Which type of transaction would result in an increase in cash and an increase in owner’s equity? |
The owner deposited cash into the business. |
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Which of the following information is not included in the three lines at the top of a company’s financial |
The Company’s industry sector. |
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Which of the following is an example of an external stakeholder? |
Bank |
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Which of the following forms of organization are legally treated as a person? |
Corporations |
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In a corporation, net worth is referred to as: |
Shareholder’s Equity |
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Business Entity Assumption |
accounting for a business must be kept separate from the personal affairs of its owner or any other business. |
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Going Concern Assumption |
assumes that a business will continue to operate into the foreseeable future. |
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Monetary Unit Assumption |
requires that accounting records are expressed in terms of money. Accounting records should all be reported in a single currency, such as Canadian dollars or euros |
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The time period principal |
requires that accounting takes place over specific time periods known as fiscal periods. These fiscal periods are of equal length, and are used when measuring the financial progress of a business. |
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Measurement (cost) principle |
The amount of purchases must be stated at their cost price |
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revenue recognition principle |
Revenue must be recognized at the time the service is provided regardless when the payment is received. |
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Expense (matching) principle |
each expense item related to revenue earned must be recorded in the same accounting period as the revenue. |
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materiality principle |
a small company would regard $500 of office supplies as an asset while a big company would likely regard it as an expense. |
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business entity concept |
the owner of a business keeps his personal affairs separate from the company's records. |
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objectivity principle |
different people looking at the same statements will arrive at the same values for the transaction. |
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full disclosure principle |
if you are involved in a lawsuit and may lose a considerable amount of money, you must include this information when borrowing from the bank. |
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consistency principle |
prevents people from changing accounting methods for the sole purpose of manipulating figures on the financial statements. |
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conservatism principle |
ensures that accounting standards are applied to select the least optimistic option when several options are available. |
