Accounting Principles and Formulas
exam questions and answers
Basic Accounting Equation - answer Assets = Liabilities + Owner's Equity
Business Entity - answer The financial statements report about a single business. Every business
gets its own set of books. Accountants do not mix in the owner's personal financial information.
Current - answer "Current" liabilities are those debts that must be paid within one year or one
operating cycle, whichever is longer.
Current Ratio - answer Current Assets/Current Liabilities = Current Ratio
Debt Ratio - answer Total Liabilities/Total Assets = Debt Ratio
Alternate Debt Ratio - answer 100% - Equity Ratio = Debt Ratio
Double Entry Accounting - answer Recording business transactions twice: once to show where
the money came from, and another time to show where the money went.
Equity Ratio - answer Total Equity/Total Assets = Equity Ratio
Alternate Equity Ratio - answer 100% - Debt Ratio = Equity Ratio
Liability Account - answer Payable or Deferred
Equity Account - answer Owner's name, Withdrawal, Dividend, Stock.
, Income Account - answer Sales, Income, or Revenue
Expense Account - answer Expense (every expense account should be marked with "exp." at the
end)
Asset Account - answer Receivable, Prepaid, Investment, Inventory (many asset accounts merely
have the name of the asset without any special identifying word)
Book value of a long-lived asset - answer Purchase Price - Accumulated Depreciation = Book
Value
Ending owner's equity formula - answer Equity (beginning) + Net Income - Withdrawal = Equity
(ending)
Gross Profit (GP) - answer Sales - CGS = GP
Income Statement Formula - answer Sales - CGS = GP
GP - Expenses = Net Income
Cash flow statement formula - answer Cash from operations
+ Cash from investment activities
+ Cash from financing activities
= Total change in cash
+ Cash - beginning of period
= Cash - end of period.
Conservative Principle - answer The accounting principle that requires accountants to resolve
financial statement uncertainty in the least favorable way.
exam questions and answers
Basic Accounting Equation - answer Assets = Liabilities + Owner's Equity
Business Entity - answer The financial statements report about a single business. Every business
gets its own set of books. Accountants do not mix in the owner's personal financial information.
Current - answer "Current" liabilities are those debts that must be paid within one year or one
operating cycle, whichever is longer.
Current Ratio - answer Current Assets/Current Liabilities = Current Ratio
Debt Ratio - answer Total Liabilities/Total Assets = Debt Ratio
Alternate Debt Ratio - answer 100% - Equity Ratio = Debt Ratio
Double Entry Accounting - answer Recording business transactions twice: once to show where
the money came from, and another time to show where the money went.
Equity Ratio - answer Total Equity/Total Assets = Equity Ratio
Alternate Equity Ratio - answer 100% - Debt Ratio = Equity Ratio
Liability Account - answer Payable or Deferred
Equity Account - answer Owner's name, Withdrawal, Dividend, Stock.
, Income Account - answer Sales, Income, or Revenue
Expense Account - answer Expense (every expense account should be marked with "exp." at the
end)
Asset Account - answer Receivable, Prepaid, Investment, Inventory (many asset accounts merely
have the name of the asset without any special identifying word)
Book value of a long-lived asset - answer Purchase Price - Accumulated Depreciation = Book
Value
Ending owner's equity formula - answer Equity (beginning) + Net Income - Withdrawal = Equity
(ending)
Gross Profit (GP) - answer Sales - CGS = GP
Income Statement Formula - answer Sales - CGS = GP
GP - Expenses = Net Income
Cash flow statement formula - answer Cash from operations
+ Cash from investment activities
+ Cash from financing activities
= Total change in cash
+ Cash - beginning of period
= Cash - end of period.
Conservative Principle - answer The accounting principle that requires accountants to resolve
financial statement uncertainty in the least favorable way.
