Accounting Cycle
List the first step of the accounting cycle.
Journalize
What does the Current Ratio measure?
Liquidity (the ability to pay short-term debts)?
The Fundamental Accounting Equation?
Assets - Liabilities = Owner’s Equity.
Which formal financial statement shows profit or loss?
The Income Statement.
What does GAAP stand for?
Generally Accepted Accounting Principles.
Define a "Source Document."
The original proof/paperwork for a transaction (e.g., invoice, receipt).
What is the formula for the Debt Ratio?
Total Liabilities ÷ Total Assets.
If Assets increase by $500, what must happen to L or OE?
Liabilities must increase by $500 OR Owner's Equity must increase by $500.
What is the primary purpose of the Balance Sheet?
To show the financial position (Assets, Liabilities, Equity) at a specific point in time.
Name a type of business organization.
Sole Proprietorship, Partnership, Corporation, Cooperative, Franchise
What is the purpose of an adjusting entry?
Updating account balances (like supplies or depreciation) to reflect the current status at the end of the fiscal period.
Why is a high "Return on Sales" desirable?
It indicates the percentage of each sales dollar that remains as profit.
Calculate: A = $50k, L = $20k. Find Owner's Equity.
$30,000.
Name one item found on an Income Statement but not a Balance Sheet.
Revenue
Cost of Goods Sold
Expenses
Define "Internal Control."
Procedures to prevent fraud, theft, or errors (e.g., locking cash, separating duties).
Why do we prepare closing entries?
Resetting temporary accounts (Revenue, Expenses, Drawings) to zero for the next period.
If a company has a liquidity issue, which ratio should they check?
The Current Ratio (or Quick Ratio).
Rearrange the equation to solve for Liabilities.
Liabilities = Assets – Owner’s Equity.
Explain the difference between an asset and an expense.
An asset is a resource expected to provide future benefit (like a building); an expense is a cost incurred to generate revenue (like hydro).
What is the "Entity Concept"?
The rule that a business is a separate legal entity from its owner, and their personal finances should not be mixed with the business.
At the end of the fiscal period, an adjusting entry is required for a Prepaid Expense account. Explain how this adjustment is recorded.
Decrease the Asset (e.g., Prepaid Insurance) and increase the Expense (e.g., Insurance Expense).
Total Revenue minus Cost of Goods Sold gives you this
Gross Profit
If a company buys equipment for $10k on credit, how does it affect the equation?
Assets increase by $10,000; Liabilities increase by $10,000. The equation remains balanced.
If a business fails to record a supplies expense adjustment, what happens to the Net Income?
Net Income is overstated.
The principle that accounting entries must be based on objective, verifiable evidence (like an invoice), not personal opinion.
Objectivity Principle