Question

What standard classifications are used in preparing a classified balance sheet? What is meant by the term "operating cycle? Distinguish between long-term investments and property, plant, and equipment. Define current assets. What basis is used for arranging individual items within the current assets section? Describe the differences between cash and accrual accounting. Discuss the major principles in Accounting What is FASB and what is its purpose? What is revenue recognition? What are the basic elements of a financial statement? What are the objectives of financial reporting?

Answer 1

Classified Balance Sheet

There are three main category used in balance sheet. These are Assets, Liabilities, and Stockholders' Equity.

Assets are subdivided into Current Assets (such as Cash, Supplies, Prepaid Insurance); Investments; Non-current assets (Property, Plant & Equipment; Intangible Assets (such as Goodwill).

Liabilities are subdivided into Current Liabilities ( Accounts Payable, Interest Payable); and Long-Term Liabilities.

The Stockholders' Equity classification is subdivided into Common Stock, Retained Earnings.

Operating Cycle :it is the average period of time required for a business to make iniial outflow of cash to produce, sell the goods and received cash from customer for goods.in simple way, we can say that operating cycle is the time required to convert our initial cash outflow in the cash inflow.

Difference between long term investment and property: long term investment is the invesment which is not related to operating activities of any company. whereas property, plant are those fixed assets which are used in operating activity.

Current assets:  current assets are the asets that wil be convert in cash within a year.

Basis used for arranging assets in CA section: Liquidity conversion nature is used. it means those who are highly liquid comes first and so on.

Difference between cash and accrual accounting:

Inaccrual accounting revenue and expenses are recorded when they earned or incurred irrespective whether cash received and paid or not.

Cash accouting is the accounting in which expenses and incomes are recorded when they actually received or paid.

Principles of accouting:

1.Accrual principle: according to this principle transaction should be recorded when they actually incurred irrespective of whether cash received and paid or not.

2.Conservatism principle: anticipated losses should be recorded but anticipated revenue should not be recorded.

3.consistency principle:we should follow same accounting method once selcted till that principle become revoke.

4. cost principle: we should record all assets,liability and equity at cost(purchase price) not on market price .

5.going concern: this principle is that our business will run for indefinate period

6.materiality: all transaction that helps in decision making to the external parties should be recorded in FS.

FASB is the independednt board of 7 members of accouting professionals who establish and communicate accounting principles in USA.

Purpose: to establish and improve GAAP.

revenue recognition:  it is an accounting principle that specify the conditions under which revenue is recognised and accounted by any organisation.

element of FS:  1.assets 2.liability 3.equity 4.revenue 5.expenses 6.gain 7. losses 8.comprehensive income

objective of financial reporting:

1.provide information to the management for planning, analysis and decision making

2.provide information to external parties such as promoters, investors, customers, govt.

3. provide information of economic resources of the organisation

4. provide information for source and utilisation of funds.