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FAC 1502 assighnment 6 for 2024
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FAC 1502 assighnment 6 for 2024Question 1: Basic Accounting Principles
Q: What are the fundamental accounting principles? A: The fundamental accounting principles
are:
1. Revenue Recognition Principle: Revenues are recognized when earned, regardless of
when the cash is received.
2. Matching Principle: Expenses should be matched with the revenues they help to
generate.
3. Cost Principle: Assets should be recorded at their cost at the time of acquisition.
4. Full Disclosure Principle: All information that affects the full understanding of a
company's financial statements must be included.
5. Objectivity Principle: Financial statements should be based on objective evidence.
6. Conservatism Principle: When in doubt, report the least optimistic figures.
7. Consistency Principle: The same accounting methods should be used from period to
period.
Question 2: Financial Statements
Q: What are the four main financial statements? A: The four main financial statements are:
1. Income Statement: Reports a company's revenues and expenses over a specific period of
time.
2. Balance Sheet: Shows a company's assets, liabilities, and equity at a specific point in
time.
3. Statement of Cash Flows: Shows the cash inflows and outflows from operating,
investing, and financing activities over a period of time.
4. Statement of Changes in Equity: Shows the changes in a company's equity over a
period of time.
Question 3: Double-Entry Accounting
Q: Explain the double-entry accounting system. A: The double-entry accounting system is a
method of bookkeeping where every transaction affects at least two accounts. It ensures that the
accounting equation (Assets = Liabilities + Equity) always stays balanced. For each transaction,
total debits must equal total credits.
Question 4: Journal Entries
Q: Provide the journal entry for a company that purchases $1,000 of inventory on credit. A:
Inventory 1,000
Accounts Payable 1,000
,Explanation: The inventory account is debited to show an increase in assets, and accounts
payable is credited to show an increase in liabilities.
Question 5: Depreciation
Q: What is depreciation, and what are the common methods of calculating it? A: Depreciation is
the systematic allocation of the cost of a tangible asset over its useful life. Common methods of
calculating depreciation include:
1. Straight-Line Method: Depreciation expense is the same each year.
o Formula: (Cost - Residual Value) / Useful Life
2. Declining Balance Method: Depreciation expense decreases each year.
o Formula: Book Value at Beginning of Year × Depreciation Rate
3. Units of Production Method: Depreciation expense is based on usage.
o Formula: (Cost - Residual Value) / Total Estimated Units × Units Used in Period
Question 6: Adjusting Entries
Q: Why are adjusting entries necessary? A: Adjusting entries are necessary to ensure that
revenues and expenses are recognized in the correct accounting period, in accordance with the
matching and revenue recognition principles. They are made at the end of an accounting period
to update the accounts before financial statements are prepared.
Question 7: Accruals and Deferrals
Q: What is the difference between accruals and deferrals? A:
Accruals: Revenues and expenses that have been earned or incurred but not yet recorded
in the accounts. Examples include accrued revenues and accrued expenses.
Deferrals: Revenues and expenses that have been recorded but not yet earned or
incurred. Examples include prepaid expenses and unearned revenues.
Question 8: Financial Ratios
Q: What is the purpose of financial ratios, and can you provide examples? A: Financial ratios are
used to evaluate the financial performance and position of a company. They help stakeholders
make informed decisions. Examples include:
1. Current Ratio: Measures liquidity.
o Formula: Current Assets / Current Liabilities
2. Debt to Equity Ratio: Measures financial leverage.
o Formula: Total Liabilities / Total Equity
3. Gross Profit Margin: Measures profitability.
o Formula: Gross Profit / Revenue
, Question 9: Inventory Valuation
Q: What are the common methods of inventory valuation? A:
1. First-In, First-Out (FIFO): Assumes that the oldest inventory items are sold first.
2. Last-In, First-Out (LIFO): Assumes that the most recently acquired inventory items are
sold first.
3. Weighted Average Cost: Calculates the average cost of all inventory items available for
sale during the period.
4. Specific Identification: Tracks the actual cost of each specific item of inventory.
Question 10: Bad Debts
Q: What is the allowance method for accounting for bad debts? A: The allowance method
involves estimating uncollectible accounts at the end of each period. The estimated amount is
recorded as an expense and a corresponding allowance for doubtful accounts (a contra-asset
account) is created. This method matches the bad debt expense to the related revenue.
Example Journal Entry
Bad Debt Expense X
Allowance for Doubtful Accounts X
Question 11: Bank Reconciliation
Q: What is a bank reconciliation, and why is it important? A: A bank reconciliation is the
process of comparing the bank statement with the company’s cash records to identify and explain
any differences. It is important to ensure the accuracy of the cash records and to detect any errors
or fraudulent activity.
Question 12: Operating vs. Capital Lease
Q: What is the difference between an operating lease and a capital lease? A:
Operating Lease: Treated like a rental agreement; lease payments are expensed as
incurred.
Capital Lease: Treated like a purchase of an asset; the lessee records the asset and a
corresponding liability on the balance sheet.
Question 13: Revenue Recognition
Q: Under the accrual basis of accounting, when is revenue recognized? A: Revenue is
recognized when it is earned and realizable, regardless of when cash is received. This means the
company has delivered the product or service and expects to be paid.
Question 14: Accounting for Contingencies
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