Title Final Exam_ REVIEW THEORIES.docx.pdf ✅

Final Exam: REVIEW THEORIES 1. Users of accounting information can be identified as internal and external users. List examples of users in each category and the type of information they require. Internal users: marketing managers, HR managers, finance directors,... Marketing managers use financial statements, and budgets to establish marketing strategies, and set effective marketing campaigns. HR managers use also financial statements and budgets to measure the cost of hiring and training employees External users: 1. Investors (owners) use financial statements to decide whether to buy, hold, or sell the stock 2. Creditors (such as suppliers and bankers) use financial statements to evaluate the risks of granting credit or lending money. 3. Regulators and Government Agencies 2. How many steps are in an accounting cycle? List all of them An accounting cycle has 9 steps: 1. Analyse business transactions 2. Journalize the transactions 3. Post to ledger accounts 4. prepare a trial balance 5. Journalize and post adjusting entries 6. prepare an adjusted trial balance 7. prepare financial statement 8. Journalize and post closing entries 9. prepare a post-closing trial balance. 3. “Bookkeeping and accounting are the same”. Do you agree? Explain. ➔ Bookkeeping usually involves only the recording of economic events and therefore is just one part of the entire accounting process. Accounting, on the other hand, involves the entire process of identifying, recording and communicating economic events. 4. Compare a multi-step with a single-step income statement. ★ A multi-step income statement ● The multi-step format includes several steps in determining net income
● A multi-step income statement provides a more detailed with key items: net sales, gross profit, operating expense, and nonoperating activities ● It breaks down the various components of revenue and expenses into multiple steps, providing a clearer picture of how a company generates its income and incurs its expenses. ★ A single-step income statement ● A single-step income statement presents a simpler with the revenue, expenses, and profit (or loss) of a business during a specific period. ● without breaking them down into various sections. It provides a straightforward view of the company's total income and total expenses. 5. The basic difference between the direct write-off and the allowance method of recording bad Debts? 1. Direct write-off methods ● No matching expense to sales revenue in the income statement ● Receivable not stated at cash realizable value. ● Not acceptable by GAAP. 2. The allowance method: ● Better matching: bad debts are created for the same accounting period in which revenue is made ● Receivable stated at cash realizable value. ● Required by GAAP. 6. What does the term “depreciation” mean? What are the different methods of depreciation? Depreciation: Process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. 3 different methods of depreciation: 1. STRAIGHT-LINE METHOD 2. UNITS OF ACTIVITY METHOD 3. DECLINING BALANCE METHOD 7. Which should be included when determining the cost of land? All necessary costs incurred to get the land in the location and condition ready for its intended use. Example purchase price, lawyer’s fees, commissions, property taxes,... 8. Unadjusted trial balance, the adjusted trial balance, and the post-closing trial balance. Explain the purpose of each and indicate the types of account balances that are contained in each. Time: 1. Trial balance: at the end of the accounting period, after posting to the general ledger 2. Adjusted trial balance: before preparing the financial statements, adjust revenue that was earned, and expenses incurred and update the accounts on the balance sheet (Prepaid Expense, Liabilities).
3. Post-closing trial balance: at the end of the accounting cycle/ (end of the accounting period), and after the financial statements have been completed, close all temporary accounts, carry permanent accounts, and make them ready for the next period. Account 1. trial balance: No Adjustment accounts Which accounts? Assets? Liabilities? Expense? Revenue? 2. adjusted trial balance: includes Adjustment accounts 3. post-closing trial balance: only permanent accounts, no temporary account 9. Compare and contrast the purposes of adjusting entries, and closing entries. ● Adjusting entries are made at the end of the accounting period before preparing the financial statement to adjust for any accruals and deferrals incur from the period. This ensures that the revenue recognition and expense recognition principles are followed. ● Closing entries are made at the end of the accounting cycle and after the financial statements have been completed to reset these temporary accounts to zero in preparation for the next accounting period 10. What is the difference between the cash basic and the accrual basic of accounting? Accrual-Basis Accounting ➔ Transactions are recorded in the periods in which the events occur. ➔ Revenues are recognized when services are performed, even if cash was not received. ➔ Expenses are recognized when incurred, even if cash was not paid. Cash-Basis Accounting ➔ Revenues are recognized only when cash is received. ➔ Expenses are recognized only when cash is paid. ➔ Not in accordance with generally accepted accounting principles (GAAP). 11. What is the difference between adjusting entries and correcting entries? Time: ● Adjusting entries are made at the end of the accounting period to adjust for any accruals and deferrals incur from the period to ensure the revenue recognition and expense recognition principles are followed ● Correcting entries are journalized and posted whenever an error is discovered Effected accounts: ● Adjusting entries always affect at least one balance sheet account and one income statement account. In contrast, correcting entries may involve any combination of accounts in need of correction 12. Define two generally accepted accounting principles that relate to adjusting the accounts. Revenue Recognition Principle: requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied (when the money is EARNED, not collected.) Expense Recognition Principle: Match expenses with revenues in the period when the company makes efforts that generate those revenues