CSS Accounting and Auditing Financial Accounting Fundamentals Flashcards

24 sample cards from the Financial Accounting Fundamentals deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. Explain the substance over form principle.

   Transactions should be accounted for according to their economic reality (substance) rather than merely their legal form, e.g., recording a finance-leased asset on the lessee's books.

2. What does completeness require in financial reporting?

   That all information necessary for users to understand the financial statements is included; an omission can make information false or misleading.

3. What is understandability?

   A qualitative characteristic requiring that information be presented clearly and concisely so that users with reasonable business knowledge can comprehend it.

4. What is the difference between a transaction and an event in accounting?

   A transaction is an exchange involving an external party that has a measurable monetary effect (e.g., a sale); an event is an occurrence (which may be internal, e.g., depreciation) that affects the financial position. All transactions are events, but not all events are transactions.

5. What is the general journal?

   The book of original (prime) entry where transactions are first recorded chronologically in double-entry form with debit, credit, and a narration.

6. What is the general ledger?

   The book of secondary entry containing all the individual accounts (assets, liabilities, equity, income, expenses) where journal entries are posted and balances are determined.

7. What is the difference between journalizing and posting?

   Journalizing is recording a transaction in the journal; posting is transferring the debit and credit amounts from the journal to the respective accounts in the ledger.

8. State the fundamental accounting equation.

   $$\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$$

9. State the rule of double-entry for the accounting equation.

   Every transaction affects at least two accounts such that total debits equal total credits, keeping the equation $\text{Assets} = \text{Liabilities} + \text{Equity}$ in balance.

10. What is an unadjusted trial balance?

    A list of all ledger account balances prepared at period end before adjusting entries, used to check that total debits equal total credits.

11. What is the main purpose of a trial balance?

    To verify the arithmetical accuracy of the ledger by confirming that $\sum \text{Debits} = \sum \text{Credits}$; it also serves as the basis for preparing financial statements.

12. Name two errors a trial balance will NOT detect.

    Errors of omission (a transaction entirely left out) and errors of principle/commission/compensating errors that still leave debits equal to credits.

13. What are adjusting entries?

    Journal entries made at the end of an accounting period to update accounts for accruals, prepayments, depreciation, and other items so that revenues and expenses are recorded in the correct period under the accrual basis.

14. What is an adjusted trial balance?

    A trial balance prepared after posting all adjusting entries; its balances are used directly to prepare the financial statements.

15. Define accrued expense and give the adjusting entry.

    An accrued expense is an expense incurred but not yet paid. Adjusting entry: Debit Expense, Credit Accrued Liability (payable).

16. Define accrued revenue and give the adjusting entry.

    Accrued revenue is income earned but not yet received or recorded. Adjusting entry: Debit Accrued Receivable, Credit Revenue.

17. Define a prepaid expense (prepayment) and give the adjusting entry to recognize the used portion.

    A prepaid expense is a payment made for benefits not yet consumed (an asset). Adjusting entry for the expired portion: Debit Expense, Credit Prepaid Expense (asset).

18. Define unearned (deferred) revenue and give the adjusting entry when it is earned.

    Unearned revenue is cash received before goods/services are provided (a liability). When earned: Debit Unearned Revenue, Credit Revenue.

19. What is depreciation?

    The systematic allocation of the depreciable cost of a tangible fixed asset over its useful life, reflecting wear, usage, and obsolescence; it is an application of the matching principle.

20. State the straight-line depreciation formula.

    $$\text{Depreciation per year} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life (years)}}$$

21. State the reducing (declining) balance depreciation formula.

    $$\text{Depreciation} = \text{Rate} \times \text{Net Book Value at beginning of year}$$ where Net Book Value $=$ Cost $-$ Accumulated Depreciation.

22. What is the adjusting entry to record depreciation, and how is the asset shown?

    Entry: Debit Depreciation Expense, Credit Accumulated Depreciation. The asset is shown at Net Book Value $=$ Cost $-$ Accumulated Depreciation. Accumulated Depreciation is a contra-asset account.

23. Define net book value (carrying amount) of a fixed asset.

    $$\text{Net Book Value} = \text{Cost} - \text{Accumulated Depreciation}$$

24. Why is depreciation called a non-cash expense?

    Because it allocates an already-incurred cost over time and reduces profit without any current cash outflow; the cash was spent when the asset was purchased.

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