"Describe the purpose of accounting in a business context.""Accounting serves to track and summarize transactions, providing different users, such as shareholders and managers, with the financial information they need."
"Explain the three sets of books most companies maintain.""Companies typically maintain financial accounting for shareholders, a balance sheet that lists all assets and liabilities on a specific date, and other internal records for management purposes."
"Define a balance sheet and its components.""A balance sheet is a financial statement that provides a snapshot of a company's assets, liabilities, and equity at a specific date, following the equation: Assets = Liabilities + Equity."
"How are assets classified on a balance sheet?""Assets are classified based on their nature and liquidity, including short-term assets like prepaid rent and accounts receivable, which represent promises of future cash."
"Explain the concept of accounts receivable.""Accounts receivable is an asset that represents money owed to a company for goods or services delivered, which is expected to be converted into cash within a specified timeframe."
"Describe the difference between accounts payable and accounts receivable.""Accounts payable is a liability representing money a company owes to suppliers for goods or services received, while accounts receivable is an asset representing money owed to the company."
"What is the significance of recording assets at purchase price?""Assets are recorded at their purchase price to reflect the actual cost incurred, rather than their current market value, ensuring accurate financial reporting."
"Explain the treatment of intangible assets on a balance sheet.""Intangible assets are recorded on the balance sheet only if they are acquired through purchase, not if they are self-created, such as a YouTube channel."
"How does market capitalization differ from book value?""Market capitalization reflects the stock market's valuation of a company, incorporating factors like brand strength and future growth potential, while book value is based solely on recorded assets and liabilities."
"Define liabilities and provide examples.""Liabilities are obligations a company owes to external parties, such as long-term debt obligations, accounts payable, and notes payable."
"What is the role of retained earnings in equity?""Retained earnings represent the total reinvested profits of a company, indicating how much net income has been retained over time rather than distributed to shareholders."
"Explain the concept of common stock and its significance.""Common stock represents ownership in a company and is issued at a par value, which is the minimum price at which shares can be sold."
"Describe how net income affects retained earnings.""Net income from the income statement is added to retained earnings at the end of the annual period, while dividends paid out to shareholders are subtracted from equity."
"What is the difference between a liability and an expense?""A liability is an outstanding payment owed, while an expense is a cost that has already been paid."
"How is interest on a loan classified in accounting?""Interest on a loan is classified as a liability only after it has accrued over time, meaning it is recognized as a payment owed once the time period has passed."
"Explain the importance of having a clear value for assets and liabilities.""Assets and liabilities must have a clear value to ensure accurate financial reporting and to reflect the true financial position of the company."
"Describe the balance sheet equation and its components.""The balance sheet equation is Assets = Equity + Liabilities. In this equation, Assets represent what the company owns, Equity represents the owner's interest in the company, and Liabilities represent what the company owes."
"Explain the purpose of a cash-flow statement in relation to balance sheets.""A cash-flow statement explains the difference in cash between two consecutive balance sheets, providing insight into the company's liquidity and cash management."
"Define retained earnings and how they are calculated.""Retained earnings are the cumulative amount of net income retained in the company after dividends are paid. They are calculated as Net Income + prior retained earnings - dividends."
"How are dividends treated in financial statements?""Dividends are not considered an expense because they are not an obligation of operations. They become a liability only once the decision to distribute them is made."
"What is treasury stock and its implications for a company?""Treasury stock refers to shares that have been repurchased by the company. It can reduce the number of shares available in the market, potentially increasing stock price and providing future flexibility."
"List the benefits of share buybacks for a company.""Benefits of buybacks include increasing stock price due to reduced supply, signaling undervaluation to the market, providing future flexibility for reissuing shares, reducing dividend payouts, and making hostile takeovers more difficult."
"Describe the income statement and its significance.""The income statement shows the results of operations over a period using accrual accounting. It is significant for assessing the health of a business model, including revenues, expenses, and net income."
"What is the matching principle in accounting?""The matching principle involves matching expenses to the revenues they help generate, rather than when cash is spent, ensuring accurate financial reporting."
"Explain the conservatism principle in accounting.""The conservatism principle dictates that anticipated losses should be recognized immediately, while anticipated gains should only be recognized when realized, reflecting a cautious approach to financial reporting."
"What are period costs and how do they differ from product costs?""Period costs, such as Selling General Administrative Costs (SGA), are not directly linked to producing a product and are tied to the period they cover, unlike product costs which are directly associated with manufacturing."
"How does revenue recognition criteria affect the booking of revenue?""Revenue recognition criteria state that revenue can only be booked once goods or services are delivered, meaning that issuing stock does not count as revenue since no goods are exchanged."
"What is net income and how is it calculated?""Net income, also known as earnings or net profit, is calculated as Revenues minus Expenses, but it does not equal the change in cash."
"Describe the role of depreciation and amortization in financial statements.""Depreciation and amortization are accounting methods used to allocate the cost of tangible and intangible assets over their useful lives, impacting the income statement and reflecting the wear and tear of assets."
"Describe the difference between expense and cost in accounting.""An expense is recognized on the income statement when it is tied to revenue, while a cost is only realized once the product has been sold."
"Explain the role of a board in private companies.""Every private company must have at least one director, who is a board member. When raising capital, financiers often request a board seat."
"Define the components of a cash flow statement.""A cash flow statement includes Operating Activities, Investing Activities, and Financing Activities, detailing sources and uses of cash over a period."
"How does accrual accounting differ from cash accounting?""Accrual accounting records costs when incurred and revenue when earned, while cash accounting records transactions only when cash is exchanged."
"Explain the concept of depreciation in accounting.""Depreciation is the process of spreading the cost of a tangible asset over its useful life, reflecting its gradual loss of value."
"What is amortization and how does it relate to intangible assets?""Amortization is the process of spreading the cost of intangible assets, like software or patents, over their useful life, similar to depreciation for tangible assets."
"Describe the reporting requirements for public companies in the US.""Public companies must file a yearly 10-K report, quarterly 10-Q reports, and 8-K reports for major events, following GAAP guidelines."
"How do international reporting standards differ from US standards?""International Financial Reporting Standards (IFRS) are used outside the US, while Generally Accepted Accounting Principles (GAAP) are used within the US."
"What are the three types of activities classified in a cash flow statement?""The three types of activities are Operating Activities, Investing Activities, and Financing Activities."
"Explain the significance of the SEC in financial reporting.""The SEC (Securities and Exchange Commission) regulates financial reporting for public companies in the US, ensuring compliance with GAAP."
"Describe the process of recognizing revenue in accrual accounting.""Revenue is recognized when the product is delivered, not when payment is received, reflecting the period in which the value is created."
"What is the purpose of the Stockholders’ Equity statement?""The Stockholders’ Equity statement shows changes in stockholders’ equity over a period of time."
"Define the term 'audit committee' in the context of a board.""An audit committee is a group within a board responsible for overseeing financial reporting and disclosure, ensuring accuracy and compliance."
"How does the concept of costs spreading over time apply to asset depreciation?""Costs of assets are spread over their useful life, with depreciation reflecting the allocation of the asset's cost over the periods it benefits."
"What is the role of the Financial Accounting Standards Board (FASB)?""The FASB establishes accounting standards and principles in the US, guiding the preparation of financial statements."
"Explain the term 'material events' in financial reporting.""Material events are significant occurrences that may impact a company's financial position, requiring disclosure in an 8-K report."
"Describe the implications of having a full board for public companies.""Public companies are required to have a full board, including executive and non-executive directors, to ensure proper governance and oversight."
"Describe the responsibility of management in financial reporting.""Management is responsible for financial reporting, similar to a student assigning their own grade, as they have the most knowledge about the company's operations."
"Explain the role of the Audit Committee of the Board of Directors.""The Audit Committee provides oversight of the financial reporting process and ensures that the financial statements are prepared in conformity with GAAP/IFRS."
"Define the relationship between auditors and the companies they audit.""Auditors are hired by the board to assess financial statements, but they may be incentivized to maintain good relationships with the company, which can lead to optimistic reporting."
"How do small and mid-sized private companies differ from large companies regarding financial reporting requirements?""Small and mid-sized private companies do not need to file certain financial reports, while large companies have specific filing requirements."
"What is the significance of debits and credits in bookkeeping?""In bookkeeping, the sum of debits must equal the sum of credits, with debits representing left-side entries and credits representing right-side entries."
"Explain the balance-sheet equation in accounting.""The balance-sheet equation can be arranged as Assets = Liabilities + Equity, ensuring that every transaction is balanced."
"Describe the rules governing bookkeeping transactions.""The rules state that no negative numbers are allowed, every transaction must have at least one debit and one credit, and debits must be listed first."
"What is the classification of advances from customers in accounting?""Advances from customers are classified as a liability, as the company owes either merchandise or a refund to the customer."
"How are legal expenses treated in accounting?""Legal expenses, such as incorporation costs, are classified as expenses rather than assets."
"What is a Super T-account and its purpose?""A Super T-account is used to calculate complex journal entries, showing workings and ensuring accuracy for updates to the books."
"Explain the treatment of cash transactions in accounting entries.""Cash transactions are recorded as debits when they increase assets and as credits when they decrease assets."
"How should personal transactions be treated in a company's books?""Only transactions related to the company should be recorded in the company's books; personal transactions should not be included."
"What is the impact of negative liabilities on expenses in accounting?""The negative of liabilities is considered expenses, which are added as debits in the accounting records."
"Describe the accounting treatment for purchasing land and buildings.""Purchasing land and buildings involves debiting the respective asset accounts and crediting cash or notes payable, reflecting the acquisition of assets."
"What is the correct terminology for 'PAR' and 'APIC' in accounting?""'PAR' should be referred to as 'Common Stock' and 'APIC' should be called 'Additional Paid-In-Capital'."
"How should maintenance expenses be classified in relation to accounts payable?""Maintenance expenses related to accounts payable are classified as expenses, while investments into buildings are considered additions to asset value."
"Describe the purpose of creating a new T-account for each new name in accounting.""Each new name, such as 'building' or 'accounts payable', deserves a new T-account to keep a running tally of the account."
"Explain how accounts payable works in transactions.""If a purchase is not paid for with cash upfront, it is recorded as accounts payable, indicating that payment will be made over a period of time."
"Define the difference between accounts receivable and notes receivable.""Accounts receivable is used when customers owe money, while notes receivable refers to money owed to the company by employees, indicating a loan."
"How are dividends related to retained earnings in accounting?""Dividends are paid out of retained earnings, which represent the accumulated profits of a company."
"What is the accounting entry when paying down a liability?""When paying down a liability, you debit the liability account and credit the cash account."
"Provide an example of a journal entry for accounts payable and cash.""An example entry would be: (Dr) Accounts Payable $33,000 and (Cr) Cash $33,000."
"Explain the role of auditors in financial reporting.""Auditors provide an opinion on the financial books but do not guarantee 100% accuracy, so skepticism is advised when reviewing management's interpretation of data."
"Describe the accounting entries involved when selling inventory.""When selling inventory, one entry affects cash and revenue at the selling price, and another entry debits the Cost Of Goods Sold (COGS) account and credits inventory."
"What is the first step in the accounting cycle?""The first step is to identify and analyze transactions by reviewing source documents and deciding which accounts are affected."
"How are journal entries recorded in the accounting cycle?""Journal entries are recorded using double-entry accounting, ensuring that every transaction affects at least two accounts."
"What is the purpose of preparing an unadjusted trial balance?""The purpose is to check that total debits equal total credits and to create a list showing the balances of each account."
"Explain the need for adjusting entries in accrual accounting.""Adjusting entries are necessary to match revenues and expenses to the correct period, ensuring accurate financial reporting."
"What are accruals in accounting?""Accruals refer to expenses that have not yet been recorded, such as unpaid wages or unrecorded revenue."
"Define deferrals in the context of accounting.""Deferrals are assets that have been used up and should be expensed, such as prepaid rent or prepaid insurance."
"How is depreciation recorded in accounting?""Depreciation is recorded in a contra asset account, which reduces the value of the asset over its useful life without directly deducting from the asset's value."
"What is the difference between tangible and intangible asset depreciation?""Tangible assets are depreciated, while intangible assets are amortized over their useful life."
"Describe the impact of period costs on financial statements.""Period costs, such as salaries, are debited as expenses for the period in which they are incurred."
"Describe the purpose of the Adjusted Trial Balance.""The Adjusted Trial Balance is used to update the trial balance with all adjusting entries, providing a clean and complete version that is utilized to prepare financial statements."
"Explain the components of the Income Statement.""The Income Statement consists of Revenue minus Expenses, resulting in Net Income."
"Define the Statement of Retained Earnings.""The Statement of Retained Earnings shows the beginning Retained Earnings plus Net Income minus Dividends."
"How is the Balance Sheet structured?""The Balance Sheet is structured with Assets equal to Liabilities plus Equity."
"What is the purpose of closing entries in accounting?""Closing entries reset temporary accounts like revenues, expenses, and dividends to zero and transfer net income to retained earnings, preparing the system for the next accounting period."
"Describe the treatment of interest on outstanding notes receivable at year-end.""Interest on outstanding notes receivable is marked as 'Interest Receivable (+A)' in an adjusting entry, which credits Interest Revenue (+R, +SE)."
"Explain the difference between accounts receivable and unearned revenue.""Accounts receivable is used for amounts owed by customers for goods or services delivered, while unearned revenue is a liability representing cash received for services not yet performed."
"How does creating an expense affect liabilities?""Creating an expense results in a corresponding credit to a liability, as expenses impact equity through net income."
"What is the relationship between expenses and liabilities?""Expenses are recorded when a service or good is used, while liabilities represent amounts owed for those expenses."
"Define depreciation in the context of financial statements.""Depreciation is an expense that decreases revenue and stockholders' equity, and is recorded as a contra-asset on the balance sheet."
"How does unearned revenue affect cash flow?""Unearned revenue increases cash flow by increasing liabilities, as it represents cash received for services that have not yet been earned."
"What happens to liabilities when services are provided over time?""When services are provided, the liability decreases as revenue is recognized, which increases stockholders' equity."
"Explain the significance of adjusting entries in accounting.""Adjusting entries are crucial for aligning cash transactions with the recognition of revenue or expenses, ensuring accurate financial reporting."
"Describe the impact of expenses on the income statement and balance sheet.""Expenses are recorded on the income statement and affect the balance sheet by decreasing stockholders' equity at the end of the fiscal period."
"What is a contra-asset account and how is it used?""A contra-asset account, like Accumulated Depreciation, is used to offset the value of an asset on the balance sheet, reflecting the reduction in value over time."
"How are order backlogs treated in financial statements?""Order backlogs are not marked on financial statements but may be disclosed in footnotes for investor information."
"Describe deferred revenue and its accounting treatment.""Deferred revenue refers to cash received before the revenue is earned. In accounting, it is recorded by debiting a liability account (Unearned Revenue) and crediting a revenue account."
"Explain the concept of deferred expenses.""Deferred expenses are cash payments made before the expense is incurred. They are recorded by debiting an expense account and crediting an asset account (Prepaid). An example is paying rent in advance."
"Define accrued expenses and their accounting implications.""Accrued expenses are expenses that have been incurred but not yet paid in cash. They are recorded by debiting an expense account and crediting a liability account."
"How are accrued revenues recognized in accounting?""Accrued revenues are revenues that have been earned but not yet received in cash. They are recorded by debiting an asset account (Receivable) and crediting a revenue account."
"Differentiate between deferred and accrued transactions.""Deferred transactions involve cash being received or paid before the revenue or expense is recognized, while accrued transactions involve cash being received or paid after the revenue or expense has been recognized."
"Explain the significance of adjusting entries in accounting.""Adjusting entries, also known as internal transactions, are necessary to ensure that revenues and expenses are recognized in the correct accounting period."
"What happens to tangible assets that increase in value?""If a tangible asset increases in value, it is not written up on the balance sheet to prevent management from misrepresenting value. However, if it decreases in value, it must be disclosed."
"Describe how accumulated depreciation is recorded.""All accumulated depreciation is stored in a single contra-asset account, which appears as a single line on the balance sheet, while separate expenses are listed on the income statement."
"How are intangible assets treated differently from tangible assets in terms of depreciation?""Intangible assets are directly amortized rather than creating a separate depreciation contra-asset account. For example, software is amortized directly."
"What is the accounting treatment for accrued receivables?""Accrued receivables, such as interest, are debited by crediting a revenue source. Interest is recognized as receivable once the period has accumulated."
"Clarify the process of recognizing revenue in accounting.""Revenue is recognized by crediting the revenue account when it is earned, and debiting the related liability to remove what is no longer owed."
"What are closing entries and their purpose?""Closing entries are internal transactions that zero out temporary accounts at the end of the accounting period, transferring their balances to retained earnings."
"Define temporary accounts in accounting.""Temporary accounts are those that reset to zero at the end of each accounting period. They track activity during a specific period and their balances are closed to retained earnings."
"Explain the relationship between revenues and retained earnings in closing entries.""In closing entries, revenues are debited to revenue accounts and credited to retained earnings, reflecting the increase in equity."
"Describe the impact of expenses on retained earnings during closing entries.""During closing entries, expenses are debited to retained earnings and credited to expense accounts, reflecting a decrease in equity."