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Final Exam Theory Questions

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ACC 100
Else Grech

ACC100 – Final Exam (Theory Questions) Chapter 1 What is the purpose of accounting? The purpose of accounting is to identify, measure, and communicate financial information to stakeholders. Another reason of accounting would be to give economic information to various users. Define the three business activities of a company and provide examples of each of these activities. There are three business activities included in a company. They are known as operating, investing, and financing activities. Operating activities are known as the day-to-day business activities of a company. An example of an operating activity would be selling a product or service for cash. In this case, it would be a cash inflow because the company earns the cash by providing their service. This would be considered a day-to-day business activity because the company is making revenue. Investing activities are defined by the purchasing and selling of long-term assets. An example of that would be the purchase of machinery for use in the company. In this case, it would be a cash outflow because the company would spend cash to buy it. Financing activities occur when the company tries to raise funds. An example would be issuing shares in exchange for cash. This would be a financing activity because the company raised cash for themselves by issuing the shares. In this case, it would be a cash inflow because cash came into the company in exchange for the shares. Define the cost principle. Give an example of when the cost principle is violated. The cost principle is found within the Generally Accepted Accounting Principles. The cost principle states that an asset should be recorded at the cost it was paid for. For example, if a company buys a piece of equipment for $20,000.00, the company should record the cost of the equipment as $20,000.00 on their financial statements. However, some companies violate the cost principle sometimes. An example of that would be if a company sells 10 computers that cost $10000.00 to your company. However, they tell you that that is the discounted price and that they actually cost $12000.00. In this case, a violation of the cost principle would be if your company records the cost of the computers on your financial statement as $12000.00 instead of $10000.00. Chapter 2 What is the objective of financial reporting? There are many objectives of financial reporting. One of objective would be to provide economic information for decision making. Some primary objectives include borrowing money, extending their company’s credit, investing, starting a new business, getting loans, and selling shares and bonds. In addition to those, there are secondary objectives. Those include reflecting resources and claims, accessing cash flows to their company, and accessing investor/creditor cash receipts. Define current assets. Define noncurrent assets. Define current liabilities and long-term liabilities. What is shareholders’ equity? Current assets are known as assets that would be used up in the company within 12 months or less. These assets are expected to be converted to cash, sold, or used up within a year or less. An example of this would be supplies. A company would expect to use up their amount of supplies within a year. Noncurrent assets are those which a company expects to use for more than a year. These types of assets are expected to be converted to cash, sold, or used up over more than a year. An example would be a building used in a company. Current liabilities are obligations that need to be paid within a year or less. It would be paid with funds coming from current assets. An example of this would be interest payable. Long-term liabilities are obligations that are expected to be paid after one year. An example of this would be a bank loan due within 5 years. Shareholders’ equity is an amount of equity that is owed to shareholders. It is made up of common shares and retained earnings. Chapter 3 What is the difference between an event and a transaction? Which one is recorded on the financial statements and which is not? An event is an interaction between an entity and something else. There are two types of events. An external event is an interaction between an entity and outside environment. An example would be a meeting between a company and a supplier. An internal event is an interaction within the entity itself. An example would be a company meeting involving the employees of the company. A transaction is also a type of event. However, a transaction only occurs if the event becomes measurable and realized. In other words, a dollar value must be added to the event in order for it to be a transaction. So in that case, transactions are recorded on financial statements whereas events aren’t recorded on financial statements. Chapter 4 Describe the cash basis of accounting. Describe the accrual basis of accountin
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