Final Exam Reviewer: Basic Financial Accounting and Reporting

A comprehensive set of 100 flashcards for reviewing key concepts in Basic Financial Accounting and Reporting.

What is accounting?

The process of identifying, recording, classifying, and communicating financial information.

What are internal users of accounting information?

Managers and owners who use accounting to plan, control, and decide.

What are external users of accounting information?

Investors, creditors, and government who use accounting to assess business stability and trustworthiness.

What does financial accounting focus on?

Reports for external users.

What is the purpose of management accounting?

Provides reports for internal users.

What is cost accounting primarily focused on?

Production costs.

What do GAAP stand for?

Generally Accepted Accounting Principles.

Why are GAAP important?

They are the rules accountants must follow.

What is the business entity assumption?

The business is separate from its owner.

What does going concern imply?

The business will continue operating in the foreseeable future.

What does the monetary unit assumption state?

Only money-recorded transactions are considered.

What is the time period concept?

Business life is divided into specific periods.

What is the historical cost principle?

Assets should be recorded at their original cost.

When should revenue be recognized?

When it is earned according to the revenue recognition principle.

What does the matching principle state?

Expenses must be matched with the revenues they generate.

What is the purpose of the full disclosure principle?

To ensure all important information is reported.

What are assets?

Resources owned by the business that yield future benefits.

What are liabilities?

Obligations or debts owed by the business.

How is equity calculated?

Equity = Assets − Liabilities.

What are the components of equity?

Owner’s capital and owner’s drawings.

What is the basic accounting equation?

Assets = Liabilities + Equity.

What does a balanced accounting equation indicate?

That the accounting records are correct.

What are the steps of the accounting cycle?

1. Analyze transactions 2. Journalize 3. Post to ledger 4. Trial balance 5. Adjusting entries 6. Adjusted trial balance 7. Financial statements 8. Closing entries 9. Post-closing trial balance.

What does journalizing mean?

Recording transactions in the journal using debits and credits.

What increases assets in journal entries?

A debit.

How do credits affect liabilities?

Credits increase liabilities.

What is the correct format for a general journal entry?

Debit first, credit second (indented), and amounts must be equal.

What is a ledger?

An account that groups all accounts together.

What is the purpose of a trial balance?

To check whether debits equal credits.

What do adjusting entries do?

Update accounts at period-end to reflect revenue and expenses accurately.

What are prepaid expenses?

Expenses that are paid before they are used.

What is accrued revenue?

Revenue that has been earned but not yet collected.

What is the purpose of depreciation in accounting?

To spread the cost of an asset over its useful life.

What is shown on an income statement?

Revenue, expenses, and net income or loss.

What does the statement of financial position show?

Assets, liabilities, and equity.

What does the statement of changes in equity include?

Changes in owner’s capital, net income, and drawings.

What are closing entries used for?

To reset temporary accounts to zero.

What accounts are considered temporary?

Revenue, expenses, and drawings.

What does the post-closing trial balance display?

Only permanent accounts to check if books are ready for the next period.

What are special journals used for?

To record repetitive transactions more efficiently.

What is a cash receipts journal?

Records all cash received by the business.

What does the bank reconciliation process involve?

Comparing the company’s books to the bank statement to find discrepancies.

What is petty cash used for?

A small fund for minor expenses.

What are the major inventory accounting methods?

1. FIFO (First-In, First-Out) 2. LIFO (Last-In, First-Out) 3. Weighted Average.

What is accounts receivable?

Money customers owe to the company.

What defines accounts payable?

Money the company owes to suppliers.

What are liquidity ratios?

Ratios that assess the company's ability to pay short-term debts.

What does the current ratio measure?

Current Assets ÷ Current Liabilities.

What is the net profit margin?

Net Income ÷ Sales.

What is the formula for the debt to equity ratio?

Total Liabilities ÷ Equity.

What are closing entries recap steps?

1. Close Revenue accounts 2. Close Expense accounts 3. Close Income Summary 4. Close Drawings.

What does the post-closing trial balance confirm?

That debits equal credits and that the accounts are ready for the next period.

Why is it important to memorize financial ratios?

To analyze a company's performance effectively.

What is a common mistake with debits and credits?

Thinking debit means bad and credit means good is incorrect.

What is the purpose of adjusting entries?

To ensure that revenues and expenses are recorded in the correct accounting period.

In what scenario would accrued expenses arise?

When expenses have been incurred but not yet paid.

What is the definition of unearned revenue?

Cash received before services are performed.

What does a sales journal record?

All credit sales made by the business.

What does the purchases journal track?

Records all credit purchases made by the business.

What should be done when deposits are in transit during bank reconciliation?

They should be added to the bank balance.

How should outstanding checks be treated in bank reconciliation?

They should be subtracted from the bank balance.

What is the formula to calculate depreciation under the straight-line method?

Depreciation Expense = (Cost − Salvage Value) ÷ Useful Life.

What does the declining balance method of depreciation focus on?

More expense is allocated to the early years of an asset's life.

Under which depreciation method is expense based on usage calculated?

Units of Production Method.

What role does timing play in adjusting entries?

They help correct the timing of when revenues and expenses are recognized.

What impact does FIFO have on financial statements when costs rise?

It shows higher income.

What is the effect of using LIFO in a period of inflation?

It shows lower income.

What is owner's drawings in terms of equity?

Withdrawals made by the owner from the business.

What must be equal in a general journal entry?

The amounts of debit and credit.

What is a common misconception about the trial balance?

A balanced trial balance does not guarantee there are no errors.

What effect does the matching principle have on expenses and revenues?

Expenses should be recorded in the same period as the revenue they help generate.

What are some common permanent accounts?

Assets, liabilities, and equity.

What is a key characteristic of temporary accounts?

They are reset to zero at the end of each accounting period.

What is vital for the accuracy of petty cash accounting?

Ensuring receipts match fund usage.

What is the importance of understanding depreciation methods?

To accurately record the costs associated with long-term assets.

What is crucial for financial analysis using ratios?

Knowing the meaning behind the formulas.

What is typically recorded in the cash payments journal?

All cash paid out by the business.

Why do businesses track due dates for accounts payable?

To avoid penalties and manage cash flows.

What does it mean if an account is classified as uncollectible?

The allowance for doubtful accounts is established.

What does a statement of changes in equity indicate?

Changes in the owner's capital over a period.

What must occur before preparing the financial statements?

Adjusting entries must be made.

Why is it important to distinguish between cash and credit transactions in special journals?

To streamline the accounting process and ensure accuracy.

What is the goal when preparing closing entries?

To prepare for the next accounting period.

How can financial ratios indicate a company's financial health?

They provide insight into liquidity, profitability, and leverage.