Question

7. Accounts can be classified according to their side of the balance sheet. Please name where these accounts would normally be classified. (eg Cash= Asset, Accounts Payable=Liability)

Equipment

Long Term Debt

Inventory

Retained Earnings

Common Stock

8. FASB and GAAP (accounting judges and arbiters) prefer Accrual accounting to Cash accounting. How does this preference relate to the Revenue Recognition Principle and the Matching Principle?

9.Depreciation often affects financial accounting reports in an important way with regard to the 2 sets of books that the government permits. What is depreciation?

10.Is depreciation’s affect, from a financial accounting perspective, usually positive or negative?

11.What is a Classified Balance Sheet?

12.How does the Classified Balance Sheet facilitate the development of the Current Ratio and its use?

13.What is the profit margin and how can it be used?

Answer 1

Ans 7

Equipment = Assets

Long Term Debt = Liability

Inventory = Current Assets

Retained Earnings = Shareholder's Equity (Liability)

Common Stock = Shareholde's Equity (Liability)

Ans 8

One of the most important provisions of GAAP’s accrual accounting revenue recognition is the matching principle, which is a crucial element for companies. The matching principle requires that companies match expenses with revenue recognition, recording both at the same time.

Accrual accounting allows a company to book revenue on its income statement at the time of the sale.

Ans 9 & 10

In accounting terms, depreciation is defined as the reduction of recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible

A depreciation expense has a direct effect on the profit that appears on a company's income statement. The larger the depreciation expense in a given year, the lower the company's reported net income – its profit. However, because depreciation is a non-cash expense, the expense doesn't change the company's cash flow.

Ans 11

A classified balance sheet is a financial statement that reports asset, liability, and equity accounts in meaningful subcategories for readers' ease of use. In other words, it breaks down each of the balance sheet accounts into smaller categories to create a more useful and meaningful report.

Ans 12

The current ratio shows how many times over the firm can pay its current debt obligations based on its current, most liquid assets.

The current ratio is calculated from balance sheet data using the following formula:

Current ratio = Current assets / current liabilities

Ans . 13

Profit Margin represents what percentage of sales has turned into profits