Accounting Chap 1-4 Essay Q's

Identify and describe the components of the Ratio of Liabilities to Owner's Equity.

Ratio of Liabilities to Owners Equity = Total Liabilities/Owner's Equity

Define depreciation. What assets are depreciated; why does a business record the depreciation?

All fixed assets, except land, lose their usefulness and, thus, are said to depreciate. As a fixed asset depreciates, a portion of its cost should be recorded as an expense. This periodic expense is called depreciation expense.

Define asset, liability, and equity.

Assets are resources owned by the business entity. Liabilities are debts owed to outsiders (creditors). Owner's equity is the owner's right to the assets of the business after all liabilities have been paid.

Compare and contrast the difference between cash-basis and accrual basis accounting.

Cash basis lets businesses record income and expenses only when cash is actually received or paid. Accrual accounting involves tracking income and expenses as they are incurred (when an invoice is sent or a bill received) instead of when money actually changes hands.

Identify and describe the four components of equity.

Four components that are included in the shareholders' equity calculation are outstanding shares, additional paid-in capital, retained earnings, and treasury stock. If shareholders' equity is positive, a company has enough assets to pay its liabilities; if it's negative, a company's liabilities surpass its assets.

Identify how to calculate current ratio. What is the value for an organization to know this?

The current ratio is calculated by dividing a company's current assets by its current liabilities. The higher the resulting figure, the more short-term liquidity the company has. A current ratio of less than 1 could be an indicator the company will be unable to pay its current liabilities. Current ratio compares a company's current assets to its current liabilities, essentially measuring a company's ability to fulfil short-term financial obligations. It's a good indicator of financial health and can warn of impending issues if the ratio is too low or even too high.

Define debit and credit. Identify which accounts have typical debits and which accounts have typical credits.

The debit and credit rules for income statement accounts are based on their relationship with owner's equity. As shown for balance sheet accounts, owner's equity accounts are increased by credits. Because revenues increase owner's equity, revenue accounts are increased by credits and decreased by debits. Because owner's equity accounts are decreased by debits, expense accounts are increased by debits and decreased by credits. Thus, the rules of debit and credit for revenue and expense accounts are as follows:

Explain the purpose of closing entries. How is that changed with automated accounting?

The entries that transfer the balances of the revenue, expense, and drawing accounts to the owner's capital account. Closing entries take place at the end of an accounting cycle as a set of journal entries. The closing entries serve to transfer these temporary account balances to permanent entries on the company's balance sheet. This resets the balance of the temporary accounts to zero, ready to begin the next accounting period.

Identify and describe the components of an Income Statement

The income statement reports the revenues and expenses for a period of time, based on the matching concept. This concept is applied by matching the expenses incurred during a period with the revenue that those expenses generated. The excess of the revenue over the expenses is called net income, net profit, or earnings. If the expenses exceed the revenue, the excess is a net loss.

Explain how to conduct a vertical analysis for a business. What is the value for an organization to know this?

The percentage analysis of the relationship of each component in a financial statement to a total within the statement. Each asset item is stated as a percent of the total assets. Each liability and owner's equity item is stated as a percent of total liabilities and owner's equity. In vertical analysis of an income statement, each item is stated as a percent of revenues or fees earned.

Describe the three versions of Trial Balances

The unadjusted trial balance is prepared on the fly, before adjusting journal entries are completed. It is a record of day-to-day transactions and can be used to balance a ledger by adjusting entries. Once a book is balanced, an adjusted trial balance can be completed. This trial balance has the final balances in all the accounts, and it is used to prepare the financial statements. The post-closing trial balance shows the balances after the closing entries have been completed.

Identify and describe the three basic types of adjusting entries.

There are three main types of adjusting entries: accruals, deferrals, and non-cash expenses. Accruals include accrued revenues and expenses. Deferrals can be prepaid expenses or deferred revenue. Non-cash expenses adjust tangible or intangible fixed assets through depreciation, depletion, etc.

Identify how to identify working capital. What is the value for an organization to know this?

Working Capital = Current Assets - Current Liabilities For example, if a company's balance sheet has 300,000 total current assets and 200,000 total current liabilities, the company's working capital is 100,000 (assets - liabilities). In short, working capital is the money available to meet your current, short-term obligations.

Explain how to conduct a horizontal analysis for a business. What is the value for an organization to know this?

amount of each item on a current financial statement is compared with the same item on an earlier statement. The increase or decrease in the amount of the item is computed together with the percent of increase or decrease. When two statements are being compared, the earlier statement is used as the base for computing the amount and the percent of change.

Identify and describe the components of the Statement of Owner's Equity.

prepared after the income statement because the net income or net loss for the period must be reported in this statement. Similarly, it is prepared before the balance sheet because the amount of owner's equity at the end of the period must be reported on the balance sheet. As a result, the statement of owner's equity is often viewed as the connecting link between the income statement and balance sheet. [(Day 1 Capital) + {(Additional Investments + Net Income - Withdrawals) = Change in Owners Equity}] = Ending Capital