8.1 Review of Key Topics

• What are accounting principles used for?

  Preparing financial statements
• Key accounting principles ensure uniformity, transparency, and comparability
• The Going Concern principle assumes a business will continue operating indefinitely.
• What does the Accrual Basis principle recognize?

  Revenues and expenses
• Steps to apply the Consistency principle

  1️⃣ Choose an accounting method

  2️⃣ Apply the method consistently

  3️⃣ Document the method used

  4️⃣ Review periodically
• What does the Conservatism principle dictate regarding losses?

  Recognize when probable
• The Materiality principle requires disclosure of information that could influence users' decisions
• The Objectivity principle ensures financial statements are based on verifiable evidence.
• What is the basic accounting equation?

  Assets = Liabilities + Equity
• The accounting equation demonstrates the balance between what a business owns and how those assets are financed
• What are assets in accounting terms?

  Resources controlled by a business
• Liabilities are obligations to transfer assets or provide services in the future.
• Match the accounting element with its definition:

  Assets ↔️ Resources controlled by a business

  Liabilities ↔️ Obligations to other entities

  Equity ↔️ Owners' stake in the business
• What is the purpose of financial statements?

  To show financial health
• The Income Statement reports a company's financial performance over a period.
• The Income Statement includes revenue, expenses, and net income
• What does the Balance Sheet show at a specific point in time?

  Assets, liabilities, equity
• Order the activities summarized in the Cash Flow Statement:

  1️⃣ Operating activities

  2️⃣ Investing activities

  3️⃣ Financing activities
• What is the primary purpose of the Income Statement?

  Show financial performance
• The Cash Flow Statement summarizes the movement of cash into and out of a company
• The Balance Sheet uses the basic accounting equation to show financial position.
• What is the purpose of the Income Statement?

  Show revenues and expenses
• Match the financial statement with its purpose:

  Balance Sheet ↔️ Financial position at a point in time

  Income Statement ↔️ Revenues and expenses over time

  Cash Flow Statement ↔️ Cash inflows and outflows over time
• What is the basic accounting equation?

  Assets = Liabilities + Equity
• The Income Statement shows a company's revenues and expenses over a period of time
• The Cash Flow Statement shows a company's inflows and outflows of cash over a period of time.
• Match the financial statement with its purpose:

  Balance Sheet ↔️ Financial position at a point in time

  Income Statement ↔️ Revenues and expenses over time

  Cash Flow Statement ↔️ Cash inflows and outflows over time
• The two major frameworks for accounting standards are IFRS and GAAP
• IFRS is more detailed and rules-based, while GAAP is more flexible and principles-based.

  False
• Which accounting framework is often used by companies operating globally?

  IFRS
• Accounting principles provide a standard framework for preparing financial statements
• Match the accounting principle with its application:

  Going Concern ↔️ Assumes the business will continue operating

  Accrual Basis ↔️ Recognizes revenues when earned

  Conservatism ↔️ Recognizes losses when probable

  Materiality ↔️ Discloses information that could influence decisions
• What does the basic accounting equation demonstrate?

  Balance between assets and financing
• Equity is the residual interest in the assets of an entity after deducting liabilities.
• Which accounting framework is primarily used in the USA?

  GAAP
• IFRS is more flexible and allows companies to tailor accounting practices to their business model.
• GAAP includes industry-specific rules, whereas IFRS allows companies to tailor accounting practices to their business model.
• Steps in preparing a journal entry:

  1️⃣ Identify the accounts affected

  2️⃣ Determine if each account should be debited or credited

  3️⃣ Document the date, description, and amounts
• What is the primary purpose of ledger accounts?

  Track balances of specific accounts
• The trial balance is prepared to ensure that the total debits equal the total credits