Financial_Accounting

Questions 1. What is the primary objective of financial reporting for external users' The primary objective of financial reporting for external users is to provide useful financial and economic information about a business to help external parties, primarily investors and creditors, make sound financial decisions. While these users are expected to have a reasonable understanding of accounting concepts and procedures they are usually interested in information to assist them in projecting future cash inflows and outflows of a business. 2. Define the following: a) Asset An asset is a probable future economic benefit owned by the entity as a result of past transactions b) Current Asset A current asset is an asset that will be used or turned into cash within one year; inventory is always considered a current asset regardless of how long it takes to produce and sell the inventory. c) Liability A liability is a probable debt or obligation of the entity as a result of past transaction, which will be paid with asset or services. d) Current Liability A current liability is a liability that will be paid in cash (or other current assets) or satisfied by providing services within the coming year. e) Contributed Capital f) Retained Earnings Retained earnings are the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business. 3. Explain what the following accounting terms mean: a) Separate-entity assumption The separate-entity assumption requires that business transactions are separate from the transactions of the owners. b) Unit-of-measure assumption The unit-of-measure assumption requires information to be reported in the national monetary unit. '''' c) Continuity Assumption Under the continuity business are assumed to operate into the foreseeable future. d) Historical cost principle The historical cost principle requires assets to be recorded at the cash-equivalent cost on the date of the transaction. Cash-equivalent cost is the cash paid plus the dollar value of all noncash considerations. 4. Why are accounting assumptions necessary' Accounting assumptions are necessary because they reflect the scope of accounting and the expectations that set certain limits on the way accounting information is reported. 5. For accounting purposes, what is an account' Explain why accounts are used in accounting system. An account is a standardized format used by organizations to accumulate the dollar effects of transactions on each financial statement item. Accounts are necessary to keep track of all increases and decreases in the fundamental accounting model. 6. What is the fundamental accounting model' The accounting fundamental accounting model is as follows: Assets = Liabilities + Shareholders’ Equity 7. Define a business transaction in the broad sense, and give an example of two different kinds of transactions. A business transaction is (a) external-an exchange of resources (assets) and obligations (debts) between a business and one or more outside parties, and (b) internal-certain events that have a direct and measurable effect on the business. 8. Explain what debit and credit mean. Debit is the left side of a T-account and credits is the right side of a T-account; debits increases asset accounts, and decrease liability and shareholders’ equity accounts. Credits decrease asset accounts, and increase liability and shareholders’ equity accounts. 9. Briefly explain what is meant by transaction analysis. What are the two steps in transaction analysis' Transaction analysis is the process of studying a transaction to determine its economic effect on the entity in terms of the accounting equation: Assets = Liabilities + Shareholders’ Equity The two principles underlying the process are: every transaction affects at least two accounts and the accounting equation must remain in balance after each transaction. 10. What two accounting equalities must be maintained in transaction analysis' The two equalities in accounting are as follows: Assets = Liabilities + Shareholder’s Equity And Debits = Credits 11. What is a journal entry' A journal entry is a method for expressing the effects of a transaction on accounts in a debit equal credit format. The title of each account to be debited are listed first, accounts to be credited are listed underneath the debited account and the account title and amounts credited are indented to the right. 12. What is a T-account' What is its purpose' A T-account is a tool for summarizing transaction effects for each account, determining balances and drawing inferences about a company’s activities. The purpose of T-accounts are a simplified representation of a ledger account with a debit column on the left and a credit column on the right. 13. How is the current ratio computed and interpreted' The current ration is computed as current assets divided by current liabilities. It measures the ability of the company to pay its short-term obligations with current assets. A high ratio normally suggests good liquidity, but a ration that is too high may indicate inefficient use of resources. The rule of thumb was a ratio between 1.0 and 2.0 (twice as many current assets as current liabilities), but sophisticated cash management systems allow many companies to minimize funds invested in current assets and have a current ratio between 1.0 14. What transaction are classified as investing activities in a statement of cash flows' What transactions are classified as financing activities' Investing activities on the cash flow statement include buying and selling of productive assets and investments. Financing activities include borrowing and repaying debt, issuing and repurchasing stock and paying dividends. Reference: Libby, R., Libby, P.A., & Short, D.G. (2011). Financial Accounting (