FAC1601 ASSIGNMENT 2
:
SEMESTER 2 OF 2024
EXPECTED QUESTIONS
AND ANSWERS
1. What is the accounting equation and why is it important?
Question: What is the accounting equation, and why is it important?
Answer: The accounting equation is:
Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}Assets=Liabilities+Equity
This equation is fundamental because it represents the relationship between a company’s
resources (assets), the claims on those resources by creditors (liabilities), and the owners
(equity). It ensures that the company’s balance sheet is always balanced, reflecting the fact that
all assets are funded either by borrowing or by owner’s investments.
2. What are the primary financial statements, and what does each one
represent?
Question: What are the primary financial statements, and what does each one represent?
Answer: The primary financial statements are:
● Balance Sheet: Shows the company’s assets, liabilities, and equity at a specific point in
time. It provides a snapshot of what the company owns and owes.
● Income Statement: Details the company’s revenues and expenses over a period of
time, resulting in net income or loss. It shows the company’s performance.
● Cash Flow Statement: Reports the cash inflows and outflows from operating, investing,
and financing activities over a period. It provides insights into the company’s liquidity.
● Statement of Changes in Equity: Details changes in equity from transactions with
shareholders and other equity changes over a period. It shows how the owner’s equity
has changed.
, 3. What is accrual accounting, and how does it differ from cash
accounting?
Question: What is accrual accounting, and how does it differ from cash accounting?
Answer:
● Accrual Accounting: Revenues and expenses are recorded when they are earned or
incurred, regardless of when cash is received or paid. This method provides a more
accurate picture of a company’s financial position and performance.
● Cash Accounting: Revenues and expenses are recorded only when cash is received or
paid. This method is simpler but may not reflect the true economic activity of a business.
4. What are adjusting entries, and why are they necessary?
Question: What are adjusting entries, and why are they necessary?
Answer: Adjusting entries are journal entries made at the end of an accounting period to update
account balances before financial statements are prepared. They ensure that revenues and
expenses are recognized in the period in which they occur, adhering to the accrual basis of
accounting. Examples include adjusting entries for accrued expenses, prepaid expenses, and
unearned revenues.
5. How do you calculate and interpret the current ratio?
Question: How do you calculate and interpret the current ratio?
Answer: The current ratio is calculated as:
Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current Assets}}
{\text{Current Liabilities}}Current Ratio=Current LiabilitiesCurrent Assets
Interpretation: This ratio measures a company’s ability to pay its short-term obligations with its
short-term assets. A current ratio greater than 1 indicates that the company has more current
assets than current liabilities, which generally suggests good liquidity. A ratio less than 1 may
indicate potential liquidity problems.
6. What is the difference between accounts payable and accounts
receivable?
Question: What is the difference between accounts payable and accounts receivable?
Answer:
● Accounts Payable: Represents amounts a company owes to suppliers or vendors for
goods and services purchased on credit. It is a liability on the balance sheet.
● Accounts Receivable: Represents amounts owed to a company by its customers for
goods and services provided on credit. It is an asset on the balance sheet.
7. What is depreciation, and why is it recorded?
:
SEMESTER 2 OF 2024
EXPECTED QUESTIONS
AND ANSWERS
1. What is the accounting equation and why is it important?
Question: What is the accounting equation, and why is it important?
Answer: The accounting equation is:
Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}Assets=Liabilities+Equity
This equation is fundamental because it represents the relationship between a company’s
resources (assets), the claims on those resources by creditors (liabilities), and the owners
(equity). It ensures that the company’s balance sheet is always balanced, reflecting the fact that
all assets are funded either by borrowing or by owner’s investments.
2. What are the primary financial statements, and what does each one
represent?
Question: What are the primary financial statements, and what does each one represent?
Answer: The primary financial statements are:
● Balance Sheet: Shows the company’s assets, liabilities, and equity at a specific point in
time. It provides a snapshot of what the company owns and owes.
● Income Statement: Details the company’s revenues and expenses over a period of
time, resulting in net income or loss. It shows the company’s performance.
● Cash Flow Statement: Reports the cash inflows and outflows from operating, investing,
and financing activities over a period. It provides insights into the company’s liquidity.
● Statement of Changes in Equity: Details changes in equity from transactions with
shareholders and other equity changes over a period. It shows how the owner’s equity
has changed.
, 3. What is accrual accounting, and how does it differ from cash
accounting?
Question: What is accrual accounting, and how does it differ from cash accounting?
Answer:
● Accrual Accounting: Revenues and expenses are recorded when they are earned or
incurred, regardless of when cash is received or paid. This method provides a more
accurate picture of a company’s financial position and performance.
● Cash Accounting: Revenues and expenses are recorded only when cash is received or
paid. This method is simpler but may not reflect the true economic activity of a business.
4. What are adjusting entries, and why are they necessary?
Question: What are adjusting entries, and why are they necessary?
Answer: Adjusting entries are journal entries made at the end of an accounting period to update
account balances before financial statements are prepared. They ensure that revenues and
expenses are recognized in the period in which they occur, adhering to the accrual basis of
accounting. Examples include adjusting entries for accrued expenses, prepaid expenses, and
unearned revenues.
5. How do you calculate and interpret the current ratio?
Question: How do you calculate and interpret the current ratio?
Answer: The current ratio is calculated as:
Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current Assets}}
{\text{Current Liabilities}}Current Ratio=Current LiabilitiesCurrent Assets
Interpretation: This ratio measures a company’s ability to pay its short-term obligations with its
short-term assets. A current ratio greater than 1 indicates that the company has more current
assets than current liabilities, which generally suggests good liquidity. A ratio less than 1 may
indicate potential liquidity problems.
6. What is the difference between accounts payable and accounts
receivable?
Question: What is the difference between accounts payable and accounts receivable?
Answer:
● Accounts Payable: Represents amounts a company owes to suppliers or vendors for
goods and services purchased on credit. It is a liability on the balance sheet.
● Accounts Receivable: Represents amounts owed to a company by its customers for
goods and services provided on credit. It is an asset on the balance sheet.
7. What is depreciation, and why is it recorded?
