MGT 8803 Financial Accounting Exam Questions and Answers Solved Correctly
Proprietorship - Answers Single Owner; unlimited liability & no taxation
Partnership - Answers More than one owner; unlimited liability & no taxation
Corporation - Answers A business owned by stockholders (shareholders -> board of directors --> top
managers); limited liability & taxation
Publicly traded or privately held
Assumptions of Financial Accounting - Answers Separate entity, unit of measurement, going concern,
periodicity, materiality
Going Concern - Answers Presume that the company will continue to operate & that it will be ongoing
Periodicity - Answers Presume that we can arbitrarily pick any time period that we want to and report
the financial results for that time period
Materiality - Answers only information that would influence the decisions of a reasonable person need
be disclosed
Users of Financial Reports - Answers Investors (Stockholders), Creditors (Banks), Government agencies
(SEC), Company management, financial analysts
GAAP - Answers Generally Accepted Accounting Principles. The standards and rules that accountants
follow while recording and reporting financial activities.
SEC - Answers Securities and Exchange Commission; rule making resides under their authority
IFRS - Answers International Financial Reporting Standards
GAAP vs Tax accounting - Answers tax accounting is done for the IRS
Qualities of Financial Statements - Answers Understandability, timeliness, full disclosure, comparability,
objectivity, decision relevance
Balance sheet - Answers measures financial position at a point in time; Assets = Liabilities + Owners
Equity
Accounting equation - Answers Assets = Liabilities + Owner's Equity
Assets - Answers Resources of the company; resources owned or rights to receive resources
Liabilities - Answers Sources of funding provided by the creditors; creditors claims
Owners' Equity - Answers sources provided by the owners; owner's claims
, Liquidity - Answers the closer they are to being cash, the more liquid they are
Cost Principle - Answers Assets are valued at their historical cost
Current vs Long Term Assets - Answers conversion to cash within 1 year
Current vs Long Term Liabilities - Answers due date within 1 year
Capital Stock - Answers what the company received when selling shares of stock
Retained Earning - Answers beg RE + NI - Dividends
Dividends - Answers distribution of earnings, and only occurs when the Board of Directors decides to
distribute the earnings
Statement of Stockholders' Equity - Answers Beg SE + NI - dividends + Issurance of Capital Stock
Cash Basis Accounting - Answers revenues will be recognized when cash is received, and expenses are
recognized when cash is paid out
Income Statement - Answers Uses Accrual Accounting; Shows the results of a company's operations
(success) over a period of time
Revenue Recognition Principle - Answers Revenue is recognized when earned; earning process is
considered to be complete even though cash has not yet been collected
Matching Principle - Answers Costs are reported as expenses in the same time period as their related
revenues
Net Income - Answers revenues - expenses
Gross Margin - Answers Net Sales - COGS
Operating Income - Answers Gross Margin - Operating Expenses
EPS - Answers Earnings Per Share; net income/# shares of stock
Statement of Cash Flows - Answers shows how cash changed from the beginning to the end of the
period; operating, investing, and financial activities
Change in Cash - Answers Investing cash flows +- Financing cash flows
Operating Activities - Answers company's day-to-day activities; selling goods or purchase of inventory
Direct Method - Answers Explicitly states where the cash came from and where the cash went to
(International)
Indirect Method - Answers starts off with the company's NI from the income statement and it makes
some adjustments to get the cash flow from the operating activities (US)
Proprietorship - Answers Single Owner; unlimited liability & no taxation
Partnership - Answers More than one owner; unlimited liability & no taxation
Corporation - Answers A business owned by stockholders (shareholders -> board of directors --> top
managers); limited liability & taxation
Publicly traded or privately held
Assumptions of Financial Accounting - Answers Separate entity, unit of measurement, going concern,
periodicity, materiality
Going Concern - Answers Presume that the company will continue to operate & that it will be ongoing
Periodicity - Answers Presume that we can arbitrarily pick any time period that we want to and report
the financial results for that time period
Materiality - Answers only information that would influence the decisions of a reasonable person need
be disclosed
Users of Financial Reports - Answers Investors (Stockholders), Creditors (Banks), Government agencies
(SEC), Company management, financial analysts
GAAP - Answers Generally Accepted Accounting Principles. The standards and rules that accountants
follow while recording and reporting financial activities.
SEC - Answers Securities and Exchange Commission; rule making resides under their authority
IFRS - Answers International Financial Reporting Standards
GAAP vs Tax accounting - Answers tax accounting is done for the IRS
Qualities of Financial Statements - Answers Understandability, timeliness, full disclosure, comparability,
objectivity, decision relevance
Balance sheet - Answers measures financial position at a point in time; Assets = Liabilities + Owners
Equity
Accounting equation - Answers Assets = Liabilities + Owner's Equity
Assets - Answers Resources of the company; resources owned or rights to receive resources
Liabilities - Answers Sources of funding provided by the creditors; creditors claims
Owners' Equity - Answers sources provided by the owners; owner's claims
, Liquidity - Answers the closer they are to being cash, the more liquid they are
Cost Principle - Answers Assets are valued at their historical cost
Current vs Long Term Assets - Answers conversion to cash within 1 year
Current vs Long Term Liabilities - Answers due date within 1 year
Capital Stock - Answers what the company received when selling shares of stock
Retained Earning - Answers beg RE + NI - Dividends
Dividends - Answers distribution of earnings, and only occurs when the Board of Directors decides to
distribute the earnings
Statement of Stockholders' Equity - Answers Beg SE + NI - dividends + Issurance of Capital Stock
Cash Basis Accounting - Answers revenues will be recognized when cash is received, and expenses are
recognized when cash is paid out
Income Statement - Answers Uses Accrual Accounting; Shows the results of a company's operations
(success) over a period of time
Revenue Recognition Principle - Answers Revenue is recognized when earned; earning process is
considered to be complete even though cash has not yet been collected
Matching Principle - Answers Costs are reported as expenses in the same time period as their related
revenues
Net Income - Answers revenues - expenses
Gross Margin - Answers Net Sales - COGS
Operating Income - Answers Gross Margin - Operating Expenses
EPS - Answers Earnings Per Share; net income/# shares of stock
Statement of Cash Flows - Answers shows how cash changed from the beginning to the end of the
period; operating, investing, and financial activities
Change in Cash - Answers Investing cash flows +- Financing cash flows
Operating Activities - Answers company's day-to-day activities; selling goods or purchase of inventory
Direct Method - Answers Explicitly states where the cash came from and where the cash went to
(International)
Indirect Method - Answers starts off with the company's NI from the income statement and it makes
some adjustments to get the cash flow from the operating activities (US)
