ACCOUNTING 526 EXAM NEWLY UPDATED COLLECTION OF EXAM
QUESTIONS AND VERIFIED ANSWERS
1. What is the fundamental accounting equation? Assets = Liabilities +
Equity. This equation represents the relationship between what a company
owns, owes, and the residual interest of owners.
2. What are the four main financial statements? The Balance Sheet, Income
Statement, Statement of Cash Flows, and Statement of Stockholders' Equity.
Each provides different perspectives on financial performance and position.
3. What is the difference between accrual and cash accounting? Accrual
accounting recognizes revenues when earned and expenses when incurred,
regardless of cash flow. Cash accounting only recognizes transactions when
cash changes hands.
4. Define the matching principle. Expenses should be recognized in the same
period as the revenues they help generate. This ensures accurate measurement
of periodic income.
5. What is materiality in accounting? An item is material if its inclusion or
omission would influence the economic decisions of users. It's a threshold
concept for financial reporting.
6. Explain the revenue recognition principle. Revenue should be recognized
when it is realized or realizable and earned, typically when goods are delivered
or services are performed.
7. What is the conservatism principle? When faced with uncertainty,
accountants should choose the solution that is least likely to overstate assets or
income. This principle promotes prudence in financial reporting.
8. Define working capital. Current Assets minus Current Liabilities. It
measures a company's short-term liquidity and operational efficiency.
9. What is the difference between capital and revenue expenditures? Capital
expenditures are capitalized as assets and depreciated over time, while revenue
expenditures are expensed immediately in the current period.
10. What are current assets? Assets expected to be converted to cash, sold, or
consumed within one year or the operating cycle, whichever is longer.
Examples include cash, accounts receivable, and inventory.
,11. Define depreciation. The systematic allocation of the cost of a tangible
fixed asset over its useful life. It reflects the consumption of the asset's
economic benefits.
12. What is goodwill? An intangible asset arising when a company acquires
another business for more than the fair value of its identifiable net assets. It
represents expected future economic benefits.
13. Explain accounts receivable. Amounts owed to a company by customers
for goods or services provided on credit. It's a current asset representing future
cash inflows.
14. What is the allowance method for bad debts? A method that estimates
uncollectible accounts in advance, creating an allowance account that reduces
accounts receivable to net realizable value.
15. Define retained earnings. The cumulative amount of net income that has
been retained in the business rather than distributed to shareholders as
dividends.
16. What are deferred revenues? Liabilities representing cash received before
the related revenue is earned. Also called unearned revenue or advance
payments.
17. Explain the term "going concern." The assumption that a business will
continue operating for the foreseeable future and not liquidate. This justifies
using historical cost and deferring certain costs.
18. What is a contra account? An account that offsets another account.
Examples include accumulated depreciation (contra-asset) and sales returns
(contra-revenue).
19. Define liquidity. The ability to convert assets to cash quickly or the ability
to meet short-term obligations. High liquidity indicates strong financial
flexibility.
20. What is the accounting period concept? Financial activities should be
divided into specific time periods (months, quarters, years) for reporting
purposes. This enables periodic performance measurement.
21. Explain par value of stock. The nominal or face value assigned to shares of
stock, representing the minimum legal capital per share. It often has little
relation to market value.
, 22. What are prepaid expenses? Assets representing payments made in
advance for expenses that will benefit future periods, such as prepaid insurance
or rent.
23. Define accounts payable. Short-term liabilities representing amounts owed
to suppliers for goods or services purchased on credit. Part of current liabilities.
24. What is book value? The net value of an asset shown on the balance sheet,
calculated as historical cost minus accumulated depreciation or amortization.
25. Explain the full disclosure principle. Financial statements should include
all information necessary for users to make informed decisions. This includes
footnotes and supplementary disclosures.
26. What is a journal entry? The initial recording of a transaction in the
accounting system, showing debits and credits to specific accounts with a date
and description.
27. Define the general ledger. The complete set of all accounts used by a
company, organized in a systematic way. It's the primary accounting record.
28. What is a trial balance? A listing of all ledger accounts with their debit or
credit balances to verify that total debits equal total credits.
29. Explain closing entries. Journal entries made at the end of an accounting
period to transfer temporary account balances (revenues, expenses) to retained
earnings.
30. What are adjusting entries? Journal entries made at the end of an
accounting period to update accounts for accruals, deferrals, and other timing
differences.
31. Define cost of goods sold (COGS). The direct costs of producing or
purchasing the goods that were sold during a period. It's calculated as beginning
inventory plus purchases minus ending inventory.
32. What is gross profit? Net sales minus cost of goods sold. It represents the
profit before considering operating expenses.
33. Explain operating income. Gross profit minus operating expenses. Also
called operating profit or EBIT (earnings before interest and taxes).
34. What is net income? The bottom line profit after all revenues, expenses,
gains, and losses have been accounted for. Also called net profit or net earnings.
QUESTIONS AND VERIFIED ANSWERS
1. What is the fundamental accounting equation? Assets = Liabilities +
Equity. This equation represents the relationship between what a company
owns, owes, and the residual interest of owners.
2. What are the four main financial statements? The Balance Sheet, Income
Statement, Statement of Cash Flows, and Statement of Stockholders' Equity.
Each provides different perspectives on financial performance and position.
3. What is the difference between accrual and cash accounting? Accrual
accounting recognizes revenues when earned and expenses when incurred,
regardless of cash flow. Cash accounting only recognizes transactions when
cash changes hands.
4. Define the matching principle. Expenses should be recognized in the same
period as the revenues they help generate. This ensures accurate measurement
of periodic income.
5. What is materiality in accounting? An item is material if its inclusion or
omission would influence the economic decisions of users. It's a threshold
concept for financial reporting.
6. Explain the revenue recognition principle. Revenue should be recognized
when it is realized or realizable and earned, typically when goods are delivered
or services are performed.
7. What is the conservatism principle? When faced with uncertainty,
accountants should choose the solution that is least likely to overstate assets or
income. This principle promotes prudence in financial reporting.
8. Define working capital. Current Assets minus Current Liabilities. It
measures a company's short-term liquidity and operational efficiency.
9. What is the difference between capital and revenue expenditures? Capital
expenditures are capitalized as assets and depreciated over time, while revenue
expenditures are expensed immediately in the current period.
10. What are current assets? Assets expected to be converted to cash, sold, or
consumed within one year or the operating cycle, whichever is longer.
Examples include cash, accounts receivable, and inventory.
,11. Define depreciation. The systematic allocation of the cost of a tangible
fixed asset over its useful life. It reflects the consumption of the asset's
economic benefits.
12. What is goodwill? An intangible asset arising when a company acquires
another business for more than the fair value of its identifiable net assets. It
represents expected future economic benefits.
13. Explain accounts receivable. Amounts owed to a company by customers
for goods or services provided on credit. It's a current asset representing future
cash inflows.
14. What is the allowance method for bad debts? A method that estimates
uncollectible accounts in advance, creating an allowance account that reduces
accounts receivable to net realizable value.
15. Define retained earnings. The cumulative amount of net income that has
been retained in the business rather than distributed to shareholders as
dividends.
16. What are deferred revenues? Liabilities representing cash received before
the related revenue is earned. Also called unearned revenue or advance
payments.
17. Explain the term "going concern." The assumption that a business will
continue operating for the foreseeable future and not liquidate. This justifies
using historical cost and deferring certain costs.
18. What is a contra account? An account that offsets another account.
Examples include accumulated depreciation (contra-asset) and sales returns
(contra-revenue).
19. Define liquidity. The ability to convert assets to cash quickly or the ability
to meet short-term obligations. High liquidity indicates strong financial
flexibility.
20. What is the accounting period concept? Financial activities should be
divided into specific time periods (months, quarters, years) for reporting
purposes. This enables periodic performance measurement.
21. Explain par value of stock. The nominal or face value assigned to shares of
stock, representing the minimum legal capital per share. It often has little
relation to market value.
, 22. What are prepaid expenses? Assets representing payments made in
advance for expenses that will benefit future periods, such as prepaid insurance
or rent.
23. Define accounts payable. Short-term liabilities representing amounts owed
to suppliers for goods or services purchased on credit. Part of current liabilities.
24. What is book value? The net value of an asset shown on the balance sheet,
calculated as historical cost minus accumulated depreciation or amortization.
25. Explain the full disclosure principle. Financial statements should include
all information necessary for users to make informed decisions. This includes
footnotes and supplementary disclosures.
26. What is a journal entry? The initial recording of a transaction in the
accounting system, showing debits and credits to specific accounts with a date
and description.
27. Define the general ledger. The complete set of all accounts used by a
company, organized in a systematic way. It's the primary accounting record.
28. What is a trial balance? A listing of all ledger accounts with their debit or
credit balances to verify that total debits equal total credits.
29. Explain closing entries. Journal entries made at the end of an accounting
period to transfer temporary account balances (revenues, expenses) to retained
earnings.
30. What are adjusting entries? Journal entries made at the end of an
accounting period to update accounts for accruals, deferrals, and other timing
differences.
31. Define cost of goods sold (COGS). The direct costs of producing or
purchasing the goods that were sold during a period. It's calculated as beginning
inventory plus purchases minus ending inventory.
32. What is gross profit? Net sales minus cost of goods sold. It represents the
profit before considering operating expenses.
33. Explain operating income. Gross profit minus operating expenses. Also
called operating profit or EBIT (earnings before interest and taxes).
34. What is net income? The bottom line profit after all revenues, expenses,
gains, and losses have been accounted for. Also called net profit or net earnings.
