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A comprehensive set of questions and answers related to financial accounting principles, covering key concepts like gaap, accounting assumptions, financial statements, and cash flow analysis. It is designed to help mba students prepare for their exams and gain a deeper understanding of financial accounting principles.
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GAAP - CORRECT ANSWERS ✔✔Generally Accepted Accounting Principles. The standards and rules that accountants follow while recording and reporting financial activities. Economic Entity - CORRECT ANSWERS ✔✔Company keeps its activity separate from its owners and other businesses. One firm, one set of books. Going Concern - CORRECT ANSWERS ✔✔The accounting assumption that a business is expected to operate indefinitely. Assumes the company will continue so asset values are at a historical cost. Monetary Unit - CORRECT ANSWERS ✔✔Financial transactions are denominated in a stable unit of measure. Everything is in US dollars Accounting Periods - CORRECT ANSWERS ✔✔The results of operations for an entity must be reported on a periodic basis, usually a year Revenue/Expense Matching - CORRECT ANSWERS ✔✔All expenses incurred to generate revenues should be recognized during the same period as those revenues Conservatism - CORRECT ANSWERS ✔✔Accounting theory advocates that it is better for potential measurement errors to understate rather than overstate profits
Understandability - CORRECT ANSWERS ✔✔Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning. Relevance - CORRECT ANSWERS ✔✔The quality of information that indicates the information makes a difference in a decision. Comparability - CORRECT ANSWERS ✔✔Ability to compare the accounting information of different companies because they use the same accounting principles. Quantitative assessment Consistency - CORRECT ANSWERS ✔✔Use of the same accounting principles and methods from year to year within a company. Allows information to be compared over time. Materiality - CORRECT ANSWERS ✔✔An item should not be reported if it is not large enough to influence the users of a financial statement. Who is the rule making body for GAAP? - CORRECT ANSWERS ✔✔Financial Accounting Standards Board (FASB) True or False: The 10K is required by the FASB - CORRECT ANSWERS ✔✔False __________ _________ can be used for comparing budgeted and forecasted costs with actual performance. - CORRECT ANSWERS ✔✔Managerial Accounting
What is depreciation? - CORRECT ANSWERS ✔✔An allocated cost of using an asset with a life of more than one year. How are assets listed on a balance sheet? - CORRECT ANSWERS ✔✔In order of liquidity Current liabilities are... - CORRECT ANSWERS ✔✔Payable within one year or on an operating cycle True or False: Dividends are an expense of the corporate. - CORRECT ANSWERS ✔✔False. The company is not required to pay dividends True or False: Capital stocks and retained earnings do NOT reflect the valuation the open market places on the company. - CORRECT ANSWERS ✔✔True The financial position at the end of a period is reflected on the ... - CORRECT ANSWERS ✔✔Balance Sheet What it the acronym to remember for T-Accounts? - CORRECT ANSWERS ✔✔DEALER (Dividends + Expenses + Assets = Liabilities + Owners Equity + Revenue) What is a trial balance? - CORRECT ANSWERS ✔✔It is used to determine errors in the ledger account entries and prepared using the accounts in the general ledger.
How do you calculate ending balance? - CORRECT ANSWERS ✔✔Total left side - total right side What are retained earnings? - CORRECT ANSWERS ✔✔Accumulated profits held for future use. An interest expense incurred and not yet paid is ...... Does it reduce or increase owners equity? - CORRECT ANSWERS ✔✔It's an accrual and it reduces owners equity. Does paying personnel reduce or increase retained earnings (OE)? - CORRECT ANSWERS ✔✔Reduce If you receive cash from something on account __ goes ___ and ____ goes _____. - CORRECT ANSWERS ✔✔Cash goes up and accounts receivable goes down. When the customer originally purchased the merchandise, AR was increased. Now, AR needs to be removed from the books because the sale has already been recorded. What are accruals? - CORRECT ANSWERS ✔✔Revenues earned or expenses incurred which impact a company's net income on the income statement, although cash related to the transaction has not yet changed hands True or False: Revenue and Expense accounts are nothing more than temporary accounts. - CORRECT ANSWERS ✔✔True What are the two types of cash flow statements? - CORRECT ANSWERS ✔✔Direct and Indirect method
An increase in a liability account is a use or source of cash. - CORRECT ANSWERS ✔✔Source An increase in investments is a use or source of cash - CORRECT ANSWERS ✔✔Use Isa note payable a short-term or long-term debt - CORRECT ANSWERS ✔✔Short-term What is the objective of the statement analysis? - CORRECT ANSWERS ✔✔Objective is to distill information found in the major financial statements into a form useful for decision making. What are the wo major forms of financial statement analysis? - CORRECT ANSWERS ✔✔Percentage Analysis (vertical and horizontal) and Ratio Analysis What is vertical analysis? - CORRECT ANSWERS ✔✔Compares individual line items such as expenses to a common factor such as sales. Items are calculated as a percentage of the base amount. This is to spot abnormalities. What is horizontal analysis? - CORRECT ANSWERS ✔✔Shows trends from period to period for an entire statement. Establishes a base year and shows incremental chances in each line of the income statement or balance sheet. What is ratio analysis? - CORRECT ANSWERS ✔✔Useful for detecting specific operating results, management policies or details of financial condition.
What are the three types of ratio analysis? - CORRECT ANSWERS ✔✔Liquidity ratios, Operating performance ratios, Financial strength ratios Quick assets don't include ___ - CORRECT ANSWERS ✔✔Inventory or prepaids What is the formula for compounding interest? - CORRECT ANSWERS ✔✔Future value = Present value(1 + interest rate) ^ # of years What is the formula for discounting? - CORRECT ANSWERS ✔✔Present value = Future Value / (1 + interest rate)^ # of years