Financial Accounting for Managers .Problem and
solutions to Approach Accounting Questions
Accelerated Depreciation Methods - answer Depreciation methods that recognize more depreciation
expense in the early years and less in the later years. Double-declining balance is an example of an
accelerated depreciation method.
Accounting Equation - answer Assets = Liabilities + Owners' Equity. This equation is fundamental and
must always be true in double entry accounting.
Accounting Period - answer The period of time for which the financial results are reported; typically
either a month or a quarter or a year.
Accounts Payable - answer Liability account used to show the obligation to pay suppliers who have
provided goods or services on credit terms.
Accounts Payable Turnover - answer Accounts Payable Turnover is a ratio that is used to measure how
efficiently a business is paying its vendors. It is calculated by dividing the credit purchases for the period
by the average accounts payable balance for the period. In the absence of credit purchases information,
we may use cost of goods sold as a substitute. The ratio represents how many times the accounts
payable turned over during the period. For most ratios in this course, we use averages when calculating
ratios with balance sheet numbers, but this is not necessary and some may choose to use beginning or
ending balances.
Accounts Receivable - answer Asset account used to show the claim to receive cash at some future date
for goods or services that have been supplied to a customer on credit terms.
Accounts Receivable Turnover - answer Accounts Receivable Turnover is a ratio that is used to measure
how efficiently a business is collecting receivables from its customers. It is calculated by dividing the
credit sales for the period by the average accounts receivable balance for the period. In the absence of
credit sales information, we may use total sales as a substitute. The ratio represents how many times the
accounts receivable turned over during the period. For most ratios in this course, we use averages when
,calculating ratios with balance sheet numbers, but this is not necessary and some may choose to use
beginning or ending balances.
Accrual - answer A revenue amount that is recorded after the revenue is earned but before the payment
is received or an expense amount that is recorded after it has been incurred but before the payment has
been made. In either case, for an accrual the exchange of cash is expected at some future point after the
initial revenue or expense is recognized.
Accrual Accounting Method - answer This is the accounting method taught in this course, followed by
most companies, and required under US GAAP and IFRS. The method follows the revenue recognition
principle, which says that revenue should be recognized in the period in which it is earned and realizable,
not necessarily when the cash is received and the matching principle which says that expenses should be
recognized in the period in which the related revenue is recognized rather than when the related cash is
paid.
Accrued Expenses - answer Liability account used to record amounts at the end of an accounting period
to recognize expenses that were incurred in the period but for which no invoice has yet been received
nor payment has yet been made. Examples are salaries/wages payable, accrued rent expense, accrued
legal fees. When the accrual is made, the debit is to the appropriate expense account (payroll expense,
rent expense, legal expense) and the credit is to the accrued expense account, which is a liability
because it represents an obligation which will need to be paid in the future. Remember accrued
expenses are NOT expenses.
Accrued Liability - answer Liability accounts that record expenses that have been recognized on the
income statement but have not yet been paid. Similar to accrued expenses.
Accrued Payroll - answer An accrued expense recorded at the end of a financial period for amounts of
payroll that have been worked but not yet paid. It is a common type of accrued expense. See also
Salaries/Wages Payable.
Accrued Revenue - answer An asset account that records revenue that has been earned and recognized
on the income statement but not yet paid for by the customer. At the time of the accrual, we debit the
receivable account and credit the appropriate accrued revenue account. When the cash transfer
ultimately occurs, we debit the cash account and credit the receivable account.
,Accumulated Depreciation - answer A contra asset account that includes the cumulative total of all
depreciation expenses recorded to date for specific assets. The credit balance in this account offsets the
debit balance in the asset account which shows the original value of the asset. When the original asset
value is netted against the accumulated depreciation for the asset you arrive at the net book value of the
asset.
Accumulated other comprehensive income - answer An equity account that consists of cumulative
unrealized gains or losses on line items classified under other comprehensive income. It includes items
such as unrealized gains or losses on investments available for sale, foreign currency gains or losses, and
pension plan gains or losses.
Adjusting (Journal) Entries - answer Entries made to adjust the balances of asset and liability accounts to
reflect changes in their values due to the passage of time or another implicit transaction.
Allowance for Doubtful Accounts - answer A contra asset account that nets against Accounts Receivable.
It is generally set up as an estimate of accounts that will ultimately prove to be uncollectible. It is then
reduced when accounts are written off. It may be adjusted at period end to reflect any updated
estimates. May also be referred to as Reserve for Bad Debts.
Amortization - answer The method for recognizing the expense of long-lived intangible assets such as
patents, copyrights, and brands, over the life of the assets. Amortization is usually calculated similar to
straight-line depreciation. Some companies use an accumulated amortization account, while other
companies may directly reduce the value of the associated asset.
Annuity - answer An investment where the purchaser receives the right to receive a fixed amount each
year for a lifetime or for a certain number of years.
Asset - answer A resource that is owned or controlled by a business and is expected to provide some
future economic benefit to the business. Examples include cash, inventory, and equipment. The business
expects that its assets will help to produce cash inflow in the future.
, Asset Turnover - answer Asset Turnover is calculated by dividing the total sales for the period by the
average total assets. This calculation is used as a measure of efficiency in the DuPont Framework. For
most ratios in this course, we use averages when calculating ratios with balance sheet numbers, but this
is not necessary and some may choose to use beginning or ending balances.
Average Collection Period - answer Average Collection Period is a measure related to accounts receivable
turnover that shows the average number of days it took for a business to collect payment from a
customer. It can be calculated by dividing the average accounts receivable by the credit sales per day.
Alternatively, it can be calculated by dividing 365 by the Accounts Receivable Turnover. For most ratios in
this course, we use averages when calculating ratios with balance sheet numbers, but this is not
necessary and some may choose to use beginning or ending balances.
Balance Sheet - answer Financial report that shows the financial position of a company at a specific point
in time; a snapshot of the resources that are owned or controlled by company, and how those resources
were financed. The balance sheet shows the balance of all asset, liability, and equity accounts as of a
given date.
Bonds - answer Long term debt instruments that are issued with a specific rate of interest and maturity
date. There are many types of bonds and they are issued by governments, utilities, and public companies
to raise funds.
CAGR - answer Acronym for Compound Annual Growth Rate. It is a measure of the rate of return of an
investment over a given period of time.
Capital - answer Capital can have different meanings depending on its context. In many contexts, it refers
to wealth of a business, whether accumulated in money or property. This wealth may be used to grow
the wealth of the business by investing in projects or other companies; hence the terms, capital
expenditures and capital budgeting. In other contexts, capital refers to the money invested in a business,
almost synonymous with equity.
Capital Expenditures - answer The cash flow related to the purchase of property and equipment. Capital
expenditures is part of the free cash flow equation.
solutions to Approach Accounting Questions
Accelerated Depreciation Methods - answer Depreciation methods that recognize more depreciation
expense in the early years and less in the later years. Double-declining balance is an example of an
accelerated depreciation method.
Accounting Equation - answer Assets = Liabilities + Owners' Equity. This equation is fundamental and
must always be true in double entry accounting.
Accounting Period - answer The period of time for which the financial results are reported; typically
either a month or a quarter or a year.
Accounts Payable - answer Liability account used to show the obligation to pay suppliers who have
provided goods or services on credit terms.
Accounts Payable Turnover - answer Accounts Payable Turnover is a ratio that is used to measure how
efficiently a business is paying its vendors. It is calculated by dividing the credit purchases for the period
by the average accounts payable balance for the period. In the absence of credit purchases information,
we may use cost of goods sold as a substitute. The ratio represents how many times the accounts
payable turned over during the period. For most ratios in this course, we use averages when calculating
ratios with balance sheet numbers, but this is not necessary and some may choose to use beginning or
ending balances.
Accounts Receivable - answer Asset account used to show the claim to receive cash at some future date
for goods or services that have been supplied to a customer on credit terms.
Accounts Receivable Turnover - answer Accounts Receivable Turnover is a ratio that is used to measure
how efficiently a business is collecting receivables from its customers. It is calculated by dividing the
credit sales for the period by the average accounts receivable balance for the period. In the absence of
credit sales information, we may use total sales as a substitute. The ratio represents how many times the
accounts receivable turned over during the period. For most ratios in this course, we use averages when
,calculating ratios with balance sheet numbers, but this is not necessary and some may choose to use
beginning or ending balances.
Accrual - answer A revenue amount that is recorded after the revenue is earned but before the payment
is received or an expense amount that is recorded after it has been incurred but before the payment has
been made. In either case, for an accrual the exchange of cash is expected at some future point after the
initial revenue or expense is recognized.
Accrual Accounting Method - answer This is the accounting method taught in this course, followed by
most companies, and required under US GAAP and IFRS. The method follows the revenue recognition
principle, which says that revenue should be recognized in the period in which it is earned and realizable,
not necessarily when the cash is received and the matching principle which says that expenses should be
recognized in the period in which the related revenue is recognized rather than when the related cash is
paid.
Accrued Expenses - answer Liability account used to record amounts at the end of an accounting period
to recognize expenses that were incurred in the period but for which no invoice has yet been received
nor payment has yet been made. Examples are salaries/wages payable, accrued rent expense, accrued
legal fees. When the accrual is made, the debit is to the appropriate expense account (payroll expense,
rent expense, legal expense) and the credit is to the accrued expense account, which is a liability
because it represents an obligation which will need to be paid in the future. Remember accrued
expenses are NOT expenses.
Accrued Liability - answer Liability accounts that record expenses that have been recognized on the
income statement but have not yet been paid. Similar to accrued expenses.
Accrued Payroll - answer An accrued expense recorded at the end of a financial period for amounts of
payroll that have been worked but not yet paid. It is a common type of accrued expense. See also
Salaries/Wages Payable.
Accrued Revenue - answer An asset account that records revenue that has been earned and recognized
on the income statement but not yet paid for by the customer. At the time of the accrual, we debit the
receivable account and credit the appropriate accrued revenue account. When the cash transfer
ultimately occurs, we debit the cash account and credit the receivable account.
,Accumulated Depreciation - answer A contra asset account that includes the cumulative total of all
depreciation expenses recorded to date for specific assets. The credit balance in this account offsets the
debit balance in the asset account which shows the original value of the asset. When the original asset
value is netted against the accumulated depreciation for the asset you arrive at the net book value of the
asset.
Accumulated other comprehensive income - answer An equity account that consists of cumulative
unrealized gains or losses on line items classified under other comprehensive income. It includes items
such as unrealized gains or losses on investments available for sale, foreign currency gains or losses, and
pension plan gains or losses.
Adjusting (Journal) Entries - answer Entries made to adjust the balances of asset and liability accounts to
reflect changes in their values due to the passage of time or another implicit transaction.
Allowance for Doubtful Accounts - answer A contra asset account that nets against Accounts Receivable.
It is generally set up as an estimate of accounts that will ultimately prove to be uncollectible. It is then
reduced when accounts are written off. It may be adjusted at period end to reflect any updated
estimates. May also be referred to as Reserve for Bad Debts.
Amortization - answer The method for recognizing the expense of long-lived intangible assets such as
patents, copyrights, and brands, over the life of the assets. Amortization is usually calculated similar to
straight-line depreciation. Some companies use an accumulated amortization account, while other
companies may directly reduce the value of the associated asset.
Annuity - answer An investment where the purchaser receives the right to receive a fixed amount each
year for a lifetime or for a certain number of years.
Asset - answer A resource that is owned or controlled by a business and is expected to provide some
future economic benefit to the business. Examples include cash, inventory, and equipment. The business
expects that its assets will help to produce cash inflow in the future.
, Asset Turnover - answer Asset Turnover is calculated by dividing the total sales for the period by the
average total assets. This calculation is used as a measure of efficiency in the DuPont Framework. For
most ratios in this course, we use averages when calculating ratios with balance sheet numbers, but this
is not necessary and some may choose to use beginning or ending balances.
Average Collection Period - answer Average Collection Period is a measure related to accounts receivable
turnover that shows the average number of days it took for a business to collect payment from a
customer. It can be calculated by dividing the average accounts receivable by the credit sales per day.
Alternatively, it can be calculated by dividing 365 by the Accounts Receivable Turnover. For most ratios in
this course, we use averages when calculating ratios with balance sheet numbers, but this is not
necessary and some may choose to use beginning or ending balances.
Balance Sheet - answer Financial report that shows the financial position of a company at a specific point
in time; a snapshot of the resources that are owned or controlled by company, and how those resources
were financed. The balance sheet shows the balance of all asset, liability, and equity accounts as of a
given date.
Bonds - answer Long term debt instruments that are issued with a specific rate of interest and maturity
date. There are many types of bonds and they are issued by governments, utilities, and public companies
to raise funds.
CAGR - answer Acronym for Compound Annual Growth Rate. It is a measure of the rate of return of an
investment over a given period of time.
Capital - answer Capital can have different meanings depending on its context. In many contexts, it refers
to wealth of a business, whether accumulated in money or property. This wealth may be used to grow
the wealth of the business by investing in projects or other companies; hence the terms, capital
expenditures and capital budgeting. In other contexts, capital refers to the money invested in a business,
almost synonymous with equity.
Capital Expenditures - answer The cash flow related to the purchase of property and equipment. Capital
expenditures is part of the free cash flow equation.
