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Financial Accounting Fundamentals
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1
Question
What are the four basic financial statements and their primary purpose?
Answer
Balance Sheet, Income Statement, Statement of Stockholders’ Equity, Cash Flows; show financial position, performance, changes in SE, and cash movements.
2
Question
Define assets in accounting terms.
Answer
Resources controlled by the entity expected to provide future economic benefits.
3
Question
Define liabilities in accounting terms.
Answer
Obligations arising from past events expected to result in outflows of resources.
4
Question
Define equity in accounting terms.
Answer
Residual interest in the assets after deducting liabilities; owners’ claim.
5
Question
Define revenue in accrual accounting terms.
Answer
Inflow of economic benefits from ordinary activities when performance obligation is satisfied.
6
Question
Define expense in accrual accounting terms.
Answer
Outflow or consumption of economic benefits incurred to generate revenue.
7
Question
Define gain in accounting terms.
Answer
Increases in equity from peripheral or incidental activities.
8
Question
Define loss in accounting terms.
Answer
Decreases in equity from peripheral or incidental activities.
9
Question
What does materiality mean in financial reporting?
Answer
Info is material if omitting or misstating could influence decisions.
10
Question
What is an accrual in adjusting entries?
Answer
Recognition of revenue or expense before cash flow occurs; increases AR/AP or defers assets/liabilities.
11
Question
What is a deferral in adjusting entries?
Answer
Revenue or expense recognized after cash flow; defers upfront recognition.
12
Question
How is depreciation recorded?
Answer
Dr Depreciation Expense; Cr Accumulated Depreciation.
13
Question
What is net book value (NBV) for a depreciable asset?
Answer
Cost minus accumulated depreciation.
14
Question
What is the closing process in accounting?
Answer
Close revenues and gains to zero; close expenses and losses; transfer net to Retained Earnings.
15
Question
What does the statement of cash flows categorize cash flows into?
Answer
Operating, Investing, Financing.
16
Question
What is the operating cycle?
Answer
Pay suppliers → perform/service → sell → collect from customers.
17
Question
Explain the 5-step revenue recognition model. (concise)
Answer
Identify contract; identify performance obligations; determine transaction price; allocate price; recognize revenue when obligations are satisfied.
18
Question
Define Gross Profit and Gross Profit Margin.
Answer
Gross Profit = Net Sales − COGS; GP% = GP ÷ Net Sales.
19
Question
What is Net Profit Margin (NPM)?
Answer
NI ÷ Net Sales.
20
Question
What does Total Asset Turnover (TAT) measure?
Answer
Net Sales ÷ Avg Total Assets.
21
Question
What is Return on Assets (ROA) and its two components (DuPont)?
Answer
ROA = NI ÷ Avg Total Assets = NPM × TAT.
22
Question
What is Earnings Per Share (EPS) and how is it calculated (basic)?
Answer
EPS = Net Income ÷ Weighted Avg Shares outstanding.
23
Question
State the normal balances for assets and expenses.
Answer
Assets and Expenses have debit normal balances.
24
Question
State the normal balances for liabilities, equity, and revenues.
Answer
Liabilities, Equity, and Revenues have credit normal balances.
25
Question
What is the effect on the accounting equation when revenue increases?
Answer
Assets increase (often via cash or AR); SE increases.
26
Question
What is the effect on the accounting equation when expenses increase?
Answer
Assets decrease (cash) or Liabilities increase (payables); SE decreases.
27
Question
What is the effect on the accounting equation when gains increase?
Answer
Assets increase or Liabilities decrease; SE increases.
28
Question
What is the effect on the accounting equation when losses increase?
Answer
Assets decrease or Liabilities increase; SE decreases.
29
Question
What is a journal entry pattern for selling inventory for cash?
Answer
Dr Cash; Cr Sales Revenue; if costed, Dr COGS; Cr Inventory.
30
Question
What is a journal entry pattern for recording a sale on account?
Answer
Dr Accounts Receivable; Cr Sales Revenue; later Dr COGS; Cr Inventory.