Fundamentals of financial and management accoundting final exam

What is Financial Accounting?

Financial accounting focuses on providing financial information to external users (e.g., investors, creditors) for decision-making. It follows established accounting standards like GAAP or IFRS.

What is Managerial Accounting?

Managerial accounting focuses on providing financial and non-financial information to internal users (e.g., managers) for planning, directing, and controlling operations. It is not bound by GAAP or IFRS.

What are the three primary financial statements?

1. The Income Statement

2. The Balance Sheet

3. The Statement of Cash Flows

What does the Income Statement report?

The Income Statement (also known as Profit and Loss Statement) reports a company's financial performance over a period of time, showing revenues, expenses, and net income or loss.

What does the Balance Sheet report?

The Balance Sheet reports a company's financial position at a specific point in time, detailing its assets, liabilities, and owner's (or stockholder's) equity.

What does the Statement of Cash Flows report?

The Statement of Cash Flows reports the cash inflows and outflows from operating, investing, and financing activities over a period, explaining how the cash balance changed.

What is the Accounting Equation?

Assets = Liabilities + Owner's Equity

Define 'Assets'.

Assets are economic resources controlled by a company that are expected to provide future economic benefits (e.g., cash, accounts receivable, equipment, buildings).

Define 'Liabilities'.

Liabilities are probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services to other entities in the future (e.g., accounts payable, notes payable).

Define 'Owner's (or Stockholder's) Equity'.

Owner's (or Stockholder's) Equity represents the residual claim on the assets of the company after deducting liabilities. It includes owner's contributions and retained earnings.

Explain the Accrual Basis of Accounting.

The accrual basis of accounting recognizes revenues when earned and expenses when incurred, regardless of when cash is received or paid. This provides a more accurate picture of a company's financial performance.

Explain the Cash Basis of Accounting.

The cash basis of accounting recognizes revenues when cash is received and expenses when cash is paid. It does not match revenues and expenses to the periods in which they are earned or incurred.

What are Generally Accepted Accounting Principles (GAAP)?

GAAP are a common set of accounting principles, standards, and procedures that companies in the U.S. must follow when compiling their financial statements. They ensure consistency and comparability.

What is one key difference between financial and managerial accounting?

Financial accounting is primarily for external users (e.g., investors), while managerial accounting is for internal users (e.g., managers) to make operational decisions.

What is a 'Fixed Cost'?

A fixed cost is a cost that remains constant in total, regardless of changes in the level of activity within a relevant range (e.g., rent, straight-line depreciation).

What is a 'Variable Cost'?

A variable cost is a cost that changes in total directly and proportionally with changes in the level of activity (e.g., direct materials, sales commissions).

What is a 'Direct Cost'?

A direct cost is a cost that can be directly and conveniently traced to a specific cost object (e.g., the cost of wood in a wooden chair).

What is an 'Indirect Cost'?

An indirect cost is a cost that cannot be easily or economically traced to a specific cost object (e.g., factory utilities, supervisor's salary). These are often referred to as manufacturing overhead.

What are 'Product Costs'?

Product costs are all costs involved in acquiring or making a product. For a manufacturer, these include direct materials, direct labor, and manufacturing overhead. They are expensed as Cost of Goods Sold when the product is sold.

What are 'Period Costs'?

Period costs are all costs that are not product costs. They are expensed in the period in which they are incurred and include selling and administrative expenses (e.g., advertising, office salaries).

What is 'Contribution Margin'?

Contribution Margin is the amount remaining from sales revenue after variable expenses have been deducted. It represents the amount available to cover fixed expenses and then to provide profit.

What is the 'Break-Even Point'?

The break-even point is the level of sales (in units or dollars) at which total revenues equal total costs, resulting in zero net operating income.

What are 'Debits' and 'Credits'?

In double-entry accounting, debits are

What is Financial Accounting?

Financial accounting focuses on providing financial information to external users (e.g., investors, creditors) for decision-making. It follows established accounting standards like GAAP or IFRS.

What is Managerial Accounting?

Managerial accounting focuses on providing financial and non-financial information to internal users (e.g., managers) for planning, directing, and controlling operations. It is not bound by GAAP or IFRS.

What are the three primary financial statements?

1. The Income Statement

2. The Balance Sheet

3. The Statement of Cash Flows

What does the Income Statement report?

The Income Statement (also known as Profit and Loss Statement) reports a company's financial performance over a period of time, showing revenues, expenses, and net income or loss.

What does the Balance Sheet report?

The Balance Sheet reports a company's financial position at a specific point in time, detailing its assets, liabilities, and owner's (or stockholder's) equity.

What does the Statement of Cash Flows report?

The Statement of Cash Flows reports the cash inflows and outflows from operating, investing, and financing activities over a period, explaining how the cash balance changed.

What is the Accounting Equation?

Assets = Liabilities + Owner's Equity

Define 'Assets'.

Assets are economic resources controlled by a company that are expected to provide future economic benefits (e.g., cash, accounts receivable, equipment, buildings).

Define 'Liabilities'.

Liabilities are probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services to other entities in the future (e.g., accounts payable, notes payable).

Define 'Owner's (or Stockholder's) Equity'.

Owner's (or Stockholder's) Equity represents the residual claim on the assets of the company after deducting liabilities. It includes owner's contributions and retained earnings.

Explain the Accrual Basis of Accounting.

The accrual basis of accounting recognizes revenues when earned and expenses when incurred, regardless of when cash is received or paid. This provides a more accurate picture of a company's financial performance.

Explain the Cash Basis of Accounting.

The cash basis of accounting recognizes revenues when cash is received and expenses when cash is paid. It does not match revenues and expenses to the periods in which they are earned or incurred.

What are Generally Accepted Accounting Principles (GAAP)?

GAAP are a common set of accounting principles, standards, and procedures that companies in the U.S. must follow when compiling their financial statements. They ensure consistency and comparability.

What is one key difference between financial and managerial accounting?

Financial accounting is primarily for external users (e.g., investors), while managerial accounting is for internal users (e.g., managers) to make operational decisions.

What is a 'Fixed Cost'?

A fixed cost is a cost that remains constant in total, regardless of changes in the level of activity within a relevant range (e.g., rent, straight-line depreciation).

What is a 'Variable Cost'?

A variable cost is a cost that changes in total directly and proportionally with changes in the level of activity (e.g., direct materials, sales commissions).

What is a 'Direct Cost'?

A direct cost is a cost that can be directly and conveniently traced to a specific cost object (e.g., the cost of wood in a wooden chair).

What is an 'Indirect Cost'?

An indirect cost is a cost that cannot be easily or economically traced to a specific cost object (e.g., factory utilities, supervisor's salary). These are often referred to as manufacturing overhead.

What are 'Product Costs'?

Product costs are all costs involved in acquiring or making a product. For a manufacturer, these include direct materials, direct labor, and manufacturing overhead. They are expensed as Cost of Goods Sold when the product is sold.

What are 'Period Costs'?

Period costs are all costs that are not product costs. They are expensed in the period in which they are incurred and include selling and administrative expenses (e.g., advertising, office salaries).

What is 'Contribution Margin'?

Contribution Margin is the amount remaining from sales revenue after variable expenses have been deducted. It represents the amount available to cover fixed expenses and then to provide profit.

What is the 'Break-Even Point'?

The break-even point is the level of sales (in units or dollars) at which total revenues equal total costs, resulting in zero net operating income.

What are 'Debits' and 'Credits'?

In double-entry accounting, debits are

How is a Balance Sheet typically structured?

A Balance Sheet is structured into three main sections:

1. Assets: Listed in order of liquidity (ease of conversion to cash), starting with current assets (e.g., cash, accounts receivable) followed by non-current assets (e.g., property, plant, and equipment).
2. Liabilities: Listed in order of maturity, starting with current liabilities (e.g., accounts payable, short-term debt) followed by non-current liabilities (e.g., long-term debt).
3. Owner's (or Stockholder's) Equity: Details the owner's investment and retained earnings.

The accounting equation \text{Assets} = \text{Liabilities} + \text{Owner's Equity} must always balance.

What is Depreciation?

Depreciation is the process of allocating the cost of a tangible asset over its useful life. It's an accounting method used to expense a portion of the asset's cost each period, reflecting the asset's wear and tear or obsolescence. It applies to long-term assets like buildings, equipment, and vehicles, but not land.

Why is Depreciation important?

Depreciation is important for:

• Matching Principle: It helps match the expense of using an asset with the revenue it generates, providing a more accurate measure of a company's profitability.

• Asset Valuation: It reduces the book value of an asset on the balance sheet over time.

• Tax Purposes: It reduces taxable income, which can lower tax liabilities.

How is the Straight-Line Method of Depreciation calculated?

The Straight-Line Method allocates an equal amount of depreciation expense to each full period of an asset's useful life. The formula is:

\text{Annual Depreciation Expense} = \frac{(\text{Cost of Asset} - \text{Salvage Value})}{\text{Useful Life in Years}}

Where:

• Cost of Asset: The historical cost of acquiring the asset.

• Salvage Value (Residual Value): The estimated value of the asset at the end of its useful life.

• Useful Life: The estimated number of years the asset is expected to be used.