Financial and Managerial Accounting Study Set 1

Business

Quiz 1 :
Introduction to Accounting and Business

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Quiz 1 :
Introduction to Accounting and Business

Accounting equation: Accounting equation refers total assets equals to total liabilities and total stock holders' equity that is, increase in assets results to decrease in assets or corresponding increase in liabilities or stock holders' equity to match the same. The relationship can be understood by the following formula. img 1. No, C is not carrying on a professional manner, by omitting portion of the financial statements. It is professional misconduct and dishonesty practice. She is misguiding the bank by not unveiling all related financial statement. 2. a. The owner's will be willing to provide all favorable information, which can influence the bank's choice to authorize the loan. Information which is terrible financial status of the company is given to the bank. b. Bank will take chance to get all critical information of the business, which can influence the bank's choice to sanction the loan. This information may incorporate the company's financial statement and past financial data to check credit standing and worthiness. c. Common interests shared by the business owner and bank are that loan is sanctioned in time and the repayment is made as per give time period and net growth to the both.

Accounting equation: Transactions of business are recorded in the accounting books. All transactions have equal debits and credits. The accounting equation implies that all assets are equal to liabilities and stockholder's equity. img 1. Effect of each transaction and balances after each transaction is stated as below: img 2. Income Statement: • Income Statement is a financial statement which shows company's financial results for a specific period of time. • It is prepared based on basic equation: img • Excess of revenues over expenses results in Net Income. • Excess of expenses over incomes results in Net Loss. Following steps are involved in preparation of Income Statement: • Consider Fees earned. • Enter various expenses such as music expense, office expense, equipment expense, advertising expense, wages expense, utilities expense, supplies expense and miscellaneous expense. • Arrive at net income by deducting expenses from fees earned. Prepare Income Statement: img Therefore, net income is $1,340 3. Retained earnings statement: • Retained earnings refers to profits made by a company which are either reinvested in the company or kept as reserve for specific reasons and are not distributed to shareholders in the form of dividends. • Retained earnings statement is a financial statement which depicts changes in retained earnings over a specific period by reconciling opening and closing balance of retained earnings using net income or net loss. Following steps are involved in preparation of Retained earnings Statement: • Consider opening balance of retained earnings. • Consider net income/ net loss during the year. • Deduct dividends paid from net income/loss to calculate increase in retained earnings • Add increase in retained earnings to opening balance of retained earnings to arrive at closing balance of retained earnings which is then transferred to balance sheet. Prepare Retained earnings Statement: img Therefore, Retained earnings is $840 4. Balance Sheet: • Balance sheet is a financial statement which shows all the assets owned by the company, all the liabilities owed by the company along with owner's share in the company at a given point of time. • It shows financial position of the company on a specified date. • It uses the accounting equation: img to show financial position as on given date. Following steps are involved in preparation of Balance Sheet: • Total assets are calculated by taking summation of current assets, fixed assets, intangible assets and long term investments. • Total liabilities are calculated by taking summation of current liabilities, long term debt, retained earnings and common stock. • Total assets and total liabilities should be equal in the balance sheet. Prepare Balance Sheet: img

Accounting is defined as an information system which reports financial performance of a business to the users. The process of reporting accounting information involves the following steps: 1) Identify the users. 2) Assess user's information needs. 3) Design the accounting information system to meet the user's needs. 4) Record economic data about business activities and events. 5) Prepare accounting reports for users. Users of accounting information can be divided into two groups such as internal and external users. Internal users of the accounting information are defined as users who are directly involved in the management and operations of the business for the purpose of decision making needs. Such information is sensitive and is not distributed to the outsiders. Internal users of accounting information are managers, employees and company executives. Examples of accounting information include information about customers, prices and plans to expand the business. External users of the accounting information are defined as users who are not involved in the managing and operating the business. External users include investors, creditors, customers, government.

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