Basic Accounting

Question 1

What is financial accounting?

Answer 1

A rule based discipline

Primarily focuses on external users

Question 2

Who are the primary users of financial accounting information?

Answer 2

• Owners or potential investors
• Lenders
• Regulatory agencies such as the IRS and the SEC

Question 3

What is managerial accounting?

Answer 3

A non-rule based discipline

Primarily focuses on internal users

Question 4

Who uses managerial accounting information?

Answer 4

Managers

Question 5

How is financial accounting information communicated to users?

Answer 5

• Balance sheet
• Income statement
• Statement of cash flows

Question 6

GAAP is authoritative guidance established by:

Answer 6

FASB and the SEC

Question 7

What can a business do to ensure that its financial information is reliable?

Answer 7

• Maintain an internal audit staff
• Engage external auditors to conduct an audit
• Comply the the Sarbanes-Oxley act

Question 8

What is a CPA?

Answer 8

Certified public accountant

Question 9

What is the basic accounting equation? And what basic financial statement is it used for?

Answer 9

Assets = liabilities + owners equity

Balance sheet

Question 10

The three basic financial statements are:

Answer 10

• Balance sheet
• Income statement
• Statement of cash flows

Question 11

The main purpose of a financial statement audit by a CPA firm is:

Answer 11

To verify that financial statements are in accordance with GAAP

Question 12

What does an income statement consist of?

Answer 12

Revenue

Expenses

Question 13

A statement of cash flows consists of:

Answer 13

• Cash flows from operations
• Investing

-Financing
___________________________
-Net cash flow

Question 14

Which financial statement includes revenues and expenses?

Answer 14

Income statement

Question 15

What are the advantages of using debt capital?

Answer 15

• Tax deductibility
• Debt does not dilute control of the firm
• Lowers costs of capital

Question 16

What are the disadvantages of using debt capital?

Answer 16

• Increases probability of financial distress

- Uses up potential debt capacity