Accounting Exam

Assets - answer-Things company owns & uses to generate revenue Liabilities - answer-Amount that company owes Equity - answer-Amount invested in company by owners; owners claim no assets Accounting equation - answer-Assets = liabilities + equity Truism in business - answer-Company never receives greater than it gives & never gives greater than it receives 4 Rules of debits & credits - answer-1. Debit amount received; credit amount given up 2. Debuts on left; credits on the right 3. In each transactions; list debits first (good) & credits last (bad) 4. Total debits = total credits Making an ethical decision - answer-1. Identify ethical concerns- use personal ethics to recognize concern 2. Analyze options- consider all good & bad consequences 3. Make ethical decision- choose best option given circumstances Fraud - answer-Intentional manipulation- focus on prevention. Once fraud is committed, losses are rarely retrieved. Fraud Triangle - answer-Opportunity (low risk of being caught), Financial Pressure (incentive), Rationalization (making situation justifiable) GAAP (generally accepted accounting principles) - answer-Financial accounting is governed by concepts & rules. 1. Relevant info affects decision of user 2. Reliable info trusted by users 3. Comparable info aids in contrasting organizations SEC- Securities and Exchange Commission - answer-Federal agency congress has charged to set reporting rules for org that sell ownership shares to public FASB (Financial Accounting Standards Board) - answer-Independent group of full-time members responsible for setting accounting rules IASB (international accounting standards board) - answer-Group that identifies preferred accounting practices & encourages global acceptance; issues IFRS Measurement/cost principle - answer-Accounting info based on actual cost. -if cash is given for a service, cost is measured by cash paid -if other is exchanged (car traded for truck), cost is measured as cash value of what is given up or received This ensure reliability, verifiability Revenue Recognition Principle - answer-Recognition = recording -happens when goods or services are provided to customers -is recorded at the amount received Expense Recognition Principle - answer-A company records the expenses it incurred to generate revenue reported Full disclosure principle - answer-A company must report the details behind financial statements that would impact users' decision. Often found in footnotes Going Concern Assumption - answer-Accounting info reflects a presumption that the business will continue operation instead of being closed or sold. -implies business/property is reported at cost instead of, say, liquidation value that insists closure Monetary Unit Assumption - answer-We can express transactions & events in monetary units. Money being the common denominator in business Time Period Assumption - answer-Presumes that the life of a company can be divided into time periods, months/years, & useful reports can be prepared for those periods Business entity assumption - answer-a business is accounted for separately from other business entities, including its owner. Materiality constraint - answer-Only information that influences decisions (through importance/dollar amt) need be disclosed Cost-benefit constraint - answer-Only info with benefits of disclosure greater than costs of providing need be disclosed