FINANCIAL ACCOUNTING COMPREHENSIVE QUESTIONS
AND ANSWERS ALL CORRECT LATEST UPDATE.
◉ Last in First Out (LIFO). Answer: An inventory valuation method which determines the value
of inventory sold as if the current units sold are the newest units placed into inventory (Last In
First Out). In a time of steadily rising inventory costs, this method leaves the lower costs in the
inventory account and recognizes the latest, higher costs as an expense in Cost of Goods Sold.
◉ Leasehold Improvements. Answer: Long-lived (multiple year) improvements made to a
leased property by the tenant in order to make the property better serve the tenant's needs. The
value of these improvements is treated as a long-lived asset (Property, Plant & Equipment, or
PP&E) and is depreciated over the life of the asset or the life of the lease, whichever is shorter.
◉ Ledger. Answer: Historically, accounting systems were comprised of books for each accounts,
known as ledgers. Ledger accounts exist for each account in the Chart of Accounts and show the
activity for accounts.
◉ Leverage. Answer: Leverage refers to the use of debt as a funding source. A company that is
highly leveraged has a large amount of debt financing compared to other funding sources.
◉ Leverage Ratio. Answer: The Leverage Ratio is calculated by dividing the total assets by the
total equity. This calculation is used as a measure of financial leverage in the DuPont
Framework. It may also be referred to as the Equity Multiplier.
◉ Liability. Answer: An obligation that a company has incurred to pay another entity, such as
amounts owed to banks, vendors, the government, or employees, or the obligation to provide
goods or services in the future.
◉ Liquidity. Answer: How quickly and easily assets and liabilities can be converted to cash. For
example, accounts receivable are more liquid than inventory because the inventory must be
sold to become a receivable and then the receivable must be collected to become cash. Hence,
the receivable is one step closer to being converted to cash than the inventory and is, therefore,
more liquid.
◉ Long-Lived Assets. Answer: Assets which are expected to provide value to the business for
periods in excess of one year. Can be physical assets, such as buildings, vehicles, or machines, or
can be intangible assets, such as patents or goodwill. Long-lived physical assets are sometimes
referred to as fixed assets.
,◉ Loss. Answer: Similar to an expense, a loss reduces owners' equity. However, a loss relates to
some activity that is outside the normal operations of the business, such as the sale of a long-
lived asset for less than its net book value.
◉ Manufacturing Business. Answer: A manufacturing business is one in which the company
manufactures the products it sells.
◉ Manufacturing Overhead. Answer: Manufacturing overhead refers to costs that are
necessarily incurred in the process of manufacturing goods, other than the costs of the raw
materials or direct labor. Some examples of overhead costs would be rent and utilities for the
manufacturing facility. Along with the costs of raw materials and labor, manufacturing overhead
costs will be allocated to the goods produced.
◉ Mark to Market. Answer: In contrast to the Historical Cost principle, mark to market refers to
the accounting method in which the recorded value of certain assets and liabilities are revised
to reflect their current market value. While accounting standards require many assets to be
recorded at historical cost, some accounting standards now allow, or even require, the values of
certain assets and liabilities to be "marked to market", or adjusted to reflect the current market
value. This is also known as fair value accounting.
◉ Matching Principle. Answer: One of the principles behind Accrual Accounting which states
that expenses should be recognized in the same period in which the related revenue is
recognized rather than when the related cash is paid.
◉ Materiality. Answer: Something is considered to be material if it is reasonably likely to impact
the decision-making of those who are using the accounting data or financial reports. Businesses
are only required to do detailed record-keeping and reporting for items that are material.
◉ Money Measurement Principle. Answer: The money measurement principle refers to the fact
that only values that can be measured in monetary terms should be recorded in the financial
accounting records.
◉ Net Book Value. Answer: The net value of the equipment account (gross book value) and the
accumulated depreciation account. May also be referred to as book value or carrying value.
◉ Net Earnings. Answer: Calculated by the formula Income before taxes - taxes. A company's
total earnings. Also called net income, net profit, and the bottom line.
, ◉ Net Income. Answer: Calculated by the formula Income before taxes - taxes. A company's total
earnings. Also called net earnings, net profit, and the bottom line.
◉ Net Present Value (NPV). Answer: The net present value is a calculation of the present values
of all the cash inflows and outflows of a project or investment. The result is a single number that
gives a good indication of what a business or a particular investment is worth today.
◉ Net Profit. Answer: Calculated by the formula Income before taxes - taxes. A company's total
earnings. Also called net earnings, net income, and the bottom line.
◉ Net Revenue. Answer: The net amount of revenue less any contra-revenue accounts. Contra-
revenue accounts may include sales returns and allowances, cash discounts or warranty
reserves, all of which are accounts with debit balances that reduce gross revenue to a net
revenue amount. Some companies report net revenue as the top line on their income statements
rather than gross revenue, implying that contra-revenue accounts exist but are not material.
◉ Net Working Capital. Answer: The cash that is tied up in a business' operations. Usually
calculated as current assets less current liabilities. The change in net working capital is part of
the free cash flow equation.
◉ Nominal Accounts. Answer: Accounts that are reset to zero at the end of each accounting
period. Nominal accounts include all revenue and expense accounts, and may also be referred to
as temporary accounts or Income Statement accounts. The net balance of nominal accounts is
transferred to retained earnings at the end of each accounting period.
◉ Non-Current Assets. Answer: Assets that the business will likely hold in their current form for
more than a year.
◉ Non-Current Liabilities. Answer: Obligations that will not be settled or paid within a year.
◉ Notes Payable. Answer: Notes Payable is a liability that arises when a business receives a
promissory note from another business. Essentially, it is a loan recorded from the recipient's
point of view. A portion or all of the note payable may be recorded in the current liabilities or
non-current liabilities section of the balance sheet, depending on how soon the business expects
to settle the note.
◉ Notes Receivable. Answer: Notes Receivable is an asset that arises when a business issues a
promissory note to another business. Essentially, it is a loan recorded from the lender's point of
view. A portion or all of the note receivable may be recorded in the current assets or non-
AND ANSWERS ALL CORRECT LATEST UPDATE.
◉ Last in First Out (LIFO). Answer: An inventory valuation method which determines the value
of inventory sold as if the current units sold are the newest units placed into inventory (Last In
First Out). In a time of steadily rising inventory costs, this method leaves the lower costs in the
inventory account and recognizes the latest, higher costs as an expense in Cost of Goods Sold.
◉ Leasehold Improvements. Answer: Long-lived (multiple year) improvements made to a
leased property by the tenant in order to make the property better serve the tenant's needs. The
value of these improvements is treated as a long-lived asset (Property, Plant & Equipment, or
PP&E) and is depreciated over the life of the asset or the life of the lease, whichever is shorter.
◉ Ledger. Answer: Historically, accounting systems were comprised of books for each accounts,
known as ledgers. Ledger accounts exist for each account in the Chart of Accounts and show the
activity for accounts.
◉ Leverage. Answer: Leverage refers to the use of debt as a funding source. A company that is
highly leveraged has a large amount of debt financing compared to other funding sources.
◉ Leverage Ratio. Answer: The Leverage Ratio is calculated by dividing the total assets by the
total equity. This calculation is used as a measure of financial leverage in the DuPont
Framework. It may also be referred to as the Equity Multiplier.
◉ Liability. Answer: An obligation that a company has incurred to pay another entity, such as
amounts owed to banks, vendors, the government, or employees, or the obligation to provide
goods or services in the future.
◉ Liquidity. Answer: How quickly and easily assets and liabilities can be converted to cash. For
example, accounts receivable are more liquid than inventory because the inventory must be
sold to become a receivable and then the receivable must be collected to become cash. Hence,
the receivable is one step closer to being converted to cash than the inventory and is, therefore,
more liquid.
◉ Long-Lived Assets. Answer: Assets which are expected to provide value to the business for
periods in excess of one year. Can be physical assets, such as buildings, vehicles, or machines, or
can be intangible assets, such as patents or goodwill. Long-lived physical assets are sometimes
referred to as fixed assets.
,◉ Loss. Answer: Similar to an expense, a loss reduces owners' equity. However, a loss relates to
some activity that is outside the normal operations of the business, such as the sale of a long-
lived asset for less than its net book value.
◉ Manufacturing Business. Answer: A manufacturing business is one in which the company
manufactures the products it sells.
◉ Manufacturing Overhead. Answer: Manufacturing overhead refers to costs that are
necessarily incurred in the process of manufacturing goods, other than the costs of the raw
materials or direct labor. Some examples of overhead costs would be rent and utilities for the
manufacturing facility. Along with the costs of raw materials and labor, manufacturing overhead
costs will be allocated to the goods produced.
◉ Mark to Market. Answer: In contrast to the Historical Cost principle, mark to market refers to
the accounting method in which the recorded value of certain assets and liabilities are revised
to reflect their current market value. While accounting standards require many assets to be
recorded at historical cost, some accounting standards now allow, or even require, the values of
certain assets and liabilities to be "marked to market", or adjusted to reflect the current market
value. This is also known as fair value accounting.
◉ Matching Principle. Answer: One of the principles behind Accrual Accounting which states
that expenses should be recognized in the same period in which the related revenue is
recognized rather than when the related cash is paid.
◉ Materiality. Answer: Something is considered to be material if it is reasonably likely to impact
the decision-making of those who are using the accounting data or financial reports. Businesses
are only required to do detailed record-keeping and reporting for items that are material.
◉ Money Measurement Principle. Answer: The money measurement principle refers to the fact
that only values that can be measured in monetary terms should be recorded in the financial
accounting records.
◉ Net Book Value. Answer: The net value of the equipment account (gross book value) and the
accumulated depreciation account. May also be referred to as book value or carrying value.
◉ Net Earnings. Answer: Calculated by the formula Income before taxes - taxes. A company's
total earnings. Also called net income, net profit, and the bottom line.
, ◉ Net Income. Answer: Calculated by the formula Income before taxes - taxes. A company's total
earnings. Also called net earnings, net profit, and the bottom line.
◉ Net Present Value (NPV). Answer: The net present value is a calculation of the present values
of all the cash inflows and outflows of a project or investment. The result is a single number that
gives a good indication of what a business or a particular investment is worth today.
◉ Net Profit. Answer: Calculated by the formula Income before taxes - taxes. A company's total
earnings. Also called net earnings, net income, and the bottom line.
◉ Net Revenue. Answer: The net amount of revenue less any contra-revenue accounts. Contra-
revenue accounts may include sales returns and allowances, cash discounts or warranty
reserves, all of which are accounts with debit balances that reduce gross revenue to a net
revenue amount. Some companies report net revenue as the top line on their income statements
rather than gross revenue, implying that contra-revenue accounts exist but are not material.
◉ Net Working Capital. Answer: The cash that is tied up in a business' operations. Usually
calculated as current assets less current liabilities. The change in net working capital is part of
the free cash flow equation.
◉ Nominal Accounts. Answer: Accounts that are reset to zero at the end of each accounting
period. Nominal accounts include all revenue and expense accounts, and may also be referred to
as temporary accounts or Income Statement accounts. The net balance of nominal accounts is
transferred to retained earnings at the end of each accounting period.
◉ Non-Current Assets. Answer: Assets that the business will likely hold in their current form for
more than a year.
◉ Non-Current Liabilities. Answer: Obligations that will not be settled or paid within a year.
◉ Notes Payable. Answer: Notes Payable is a liability that arises when a business receives a
promissory note from another business. Essentially, it is a loan recorded from the recipient's
point of view. A portion or all of the note payable may be recorded in the current liabilities or
non-current liabilities section of the balance sheet, depending on how soon the business expects
to settle the note.
◉ Notes Receivable. Answer: Notes Receivable is an asset that arises when a business issues a
promissory note to another business. Essentially, it is a loan recorded from the lender's point of
view. A portion or all of the note receivable may be recorded in the current assets or non-
