Accounting Questions & Answers |1

Q1. What do you mean by financial assets? Explain the difference between cash
equivalents and short term marketable securities.

A financial asset is a tangible asset whose value is derived from a contractual claim,
such as bank deposits, bonds, and stocks. Financial assets are usually more liquid
than other tangible assets, such as commodities or real estate, and may be traded
on financial markets.

The difference between fair market value and cost of these investments was not
significant for either year. ... Cash Equivalents and Marketable Securities All short-
term investments purchased with an original maturity of three months or less are
considered cash equivalents.

Q2. Define Cash and Bank Accounts. What do you mean by Bank Reconciliation
Statement? What are the main reasons for the differences between the cash
book and the bank statement?

The sum of all coins, currency and other unrestricted liquid funds, that have been
placed on deposit with a financial institution. Cash at bank is considered a highly
liquid form of current asset, and when reported on a business' balance sheet, it is
combined with cash in hand for accounting purposes.

Bank reconciliation is a process that explains the difference between the bank
balance shown in an organization's bank statement, as supplied by the bank, and
the corresponding amount shown in the organization's own [accounting] records at
a particular point of time.

The reasons for the difference between the balance on the bank statement and the
balance on the books include outstanding checks, deposits in transit, bank service
charges, check printing charges, errors on the books, errors by the bank, electronic
charges on the bank statement not yet recorded on the books, and electronic
deposits on the bank statement that are not yet recorded on the books.

If an item is on the books but has not yet appeared on the bank statement
(outstanding checks, deposits in transit), the items are entered as an adjustment to
the balance per bank statement. Outstanding checks are a deduction to the balance
per bank; deposits in transit are an addition to the balance per bank.

If an item is on the bank statement but has not yet been entered on the books, the
items are entered as an adjustment to the balance per books. Bank service
charges, check printing charges, and other electronic deductions that are not yet
recorded on the books are deductions from the cash balance on the books.
Electronic deposits not yet on the books are added to the cash balance per books.
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Q3. What do you mean by accounts receivable and the estimation of bad debts?
Explain the methods for estimation of bad debts.

If we imagine buying something, such as groceries, it's easy to picture ourselves

standing at the checkout, writing out a personal check, and taking possession of the
goods. It's a simple transactionwe exchange our money for the store's groceries.

In the world of business, however, many companies must be willing to sell their
goods (or services) on credit. This would be equivalent to the grocer transferring
ownership of the groceries to you, issuing a sales invoice, and allowing you to pay
for the groceries at a later date.

Whenever a seller decides to offer its goods or services on credit, two things
happen: (1) the seller boosts its potential to increase revenues since many buyers
appreciate the convenience and efficiency of making purchases on credit, and (2)
the seller opens itself up to potential losses if its customers do not pay the sales
invoice amount when it becomes due.

Under the accrual basis of accounting (which we will be using throughout our
discussion) a sale on credit will:

Increase sales or sales revenues, which are reported on the income statement, and

Increase the amount due from customers, which is reported as accounts receivable
an asset reported on the balance sheet.

If a buyer does not pay the amount it owes, the seller will report:

A credit loss or bad debts expense on its income statement, and

A reduction of accounts receivable on its balance sheet.

With respect to financial statements, the seller should report its estimated credit
losses as soon as possible using the allowance method. For income tax purposes,
however, losses are reported at a later date through the use of the direct write-off
method.

Q4. What do you mean by liabilities? Explain the difference between current and
non-current liabilities.

A liability is an obligation and it is reported on a company's balance sheet. A

common example of a liability is accounts payable. Accounts payable arise when a
company purchases goods or services on credit from a supplier. When the
company pays the supplier, the company's accounts payable is reduced.
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Other common examples of liabilities include loans payable, bonds payable,

interest payable, wages payable, and income taxes payable. Less common
liabilities are customer deposits and deferred revenues. Deferred revenues come
about when customers prepay a company for work to be done in a future
accounting period. When the company performs the work, the liability will be
reduced and the company will report the amount it earned as revenues on its
income statement.

Liabilities are also part of the accounting equation: Assets = Liabilities +

Stockholders' Equity. Liabilities are often viewed as claims on a company's assets.
However, liabilities can also be thought of as a source of a company's assets.

Current liabilities are a company's debts or obligations that are due within one
year, appearing on the company's balance sheet and include short term debt,
accounts payable, accrued liabilities and other debts.

Essentially, these are bills that are due to creditors and suppliers within a short
period of time. Normally, companies withdraw or cash current assets in order to pay
their current liabilities.

Noncurrent liabilities are long-term financial obligations listed on a company's

balance sheet that are not due within the present accounting year, such as long-
term borrowing, bonds payable and long-term lease obligations.

Q5. What do you mean by International Accounting standards? Explain any 20

standards.

The International Accounting Standards Board (IASB) is the independent,

accounting standard-setting body of the IFRS Foundation. The IASB was founded
on April 1, 2001, as the successor to the International Accounting Standards
Committee (IASC).

International Accounting Standards

# Name Issued
IAS 1 Presentation of Financial Statements 2007*
IAS 2 Inventories 2005*
IAS 3 Consolidated Financial Statements
Superseded in 1989 by IAS 27 and IAS 28 1976
IAS 4 Depreciation Accounting
Withdrawn in 1999
IAS 5 Information to Be Disclosed in Financial Statements
Superseded by IAS 1 effective 1 July 1998 1976
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IAS 6 Accounting Responses to Changing Prices

Superseded by IAS 15, which was withdrawn December 2003
IAS 7 Statement of Cash Flows 1992
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
2003
IAS 9 Accounting for Research and Development Activities
Superseded by IAS 38 effective 1 July 1999
IAS 10 Events After the Reporting Period 2003
IAS 11 Construction Contracts
Will be superseded by IFRS 15 as of 1 January 2018 1993
IAS 12 Income Taxes 1996*
IAS 13 Presentation of Current Assets and Current Liabilities
Superseded by IAS 1 effective 1 July 1998
IAS 14 Segment Reporting
Superseded by IFRS 8 effective 1 January 2009 1997
IAS 15 Information Reflecting the Effects of Changing Prices
Withdrawn December 2003 2003
IAS 16 Property, Plant and Equipment 2003*
IAS 17 Leases
Will be superseded by IFRS 16 as of 1 January 2019 2003*
IAS 18 Revenue Will be superseded by IFRS 15
as of 1 January 2018 1993*
IAS 19 Employee Benefits (1998)
Superseded by IAS 19 (2011) effective 1 January 2013 1998
IAS 19 Employee Benefits (2011) 2011*
IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance 1983

Q6. Explain the principles of accounting? For example, principles of fair

presentation, going concern, accruals, consistency, materiality, relevance,
reliability, prudence, comparability, business entity, faithful representation,
neutrality, completeness, understandability.

1. Reliable, Verifiable, and Objective

In addition to the basic accounting principles and guidelines listed in Part 1, accounting
information should be reliable, verifiable, and objective. For example, showing land at its
original cost of $10,000 (when it was purchased 50 years ago) is considered to be more
reliable, verifiable, and objective than showing it at its current market value of $250,000.
Eight different accountants will wholly agree that the original cost of the land was $10,000
they can read the offer and acceptance for $10,000, see a transfer tax based on
$10,000, and review documents that confirm the cost was $10,000. If you ask the same
eight accountants to give you the land's current value, you will likely receive eight different
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estimates. Because the current value amount is less reliable, less verifiable, and less
objective than the original cost, the original cost is used.

The accounting profession has been willing to move away from the cost principle if there
are reliable, verifiable, and objective amounts involved. For example, if a company has an
investment in stock that is actively traded on a stock exchange, the company may be
required to show the current value of the stock instead of its original cost.

2. Consistency

Accountants are expected to be consistent when applying accounting principles,

procedures, and practices. For example, if a company has a history of using the FIFO cost
flow assumption, readers of the company's most current financial statements have every
reason to expect that the company is continuing to use the FIFO cost flow assumption. If
the company changes this practice and begins using the LIFO cost flow assumption, that
change must be clearly disclosed.

3. Comparability

Investors, lenders, and other users of financial statements expect that financial statements
of one company can be compared to the financial statements of another company in the
same industry. Generally accepted accounting principles may provide for comparability
between the financial statements of different companies. For example, the FASB requires
that expenses related to research and development (R&D) be expensed when incurred.
Prior to its rule, some companies expensed R&D when incurred while other companies
deferred R&D to the balance sheet and expensed them at a later date.

Q7. What do you mean by financial statement i.e. adjustment, income statement,
balance sheet, closing entries and reversing entries.

A financial statement (or financial report) is a formal record of the financial activities
and position of a business, person, or other entity. Relevant financial information is
presented in a structured manner and in a form easy to understand.
The four main types of financial statements are:
Statement of Financial Position
Statement of Financial Position, also known as the Balance Sheet, presents the financial
position of an entity at a given date. It is comprised of the following three elements:
Assets: Something a business owns or controls (e.g. cash, inventory, plant and machinery,
etc)
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Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc)
Equity: What the business owes to its owners. This represents the amount of capital that
remains in the business after its assets are used to pay off its outstanding liabilities. Equity
therefore represents the difference between the assets and liabilities.
Income Statement
Income Statement, also known as the Profit and Loss Statement, reports the company's
financial performance in terms of net profit or loss over a specified period. Income
Statement is composed of the following two elements:
Income: What the business has earned over a period (e.g. sales revenue, dividend
income, etc)
Expense: The cost incurred by the business over a period (e.g. salaries and wages,
depreciation, rental charges, etc)
Net profit or loss is arrived by deducting expenses from income.
Cash Flow Statement
Cash Flow Statement, presents the movement in cash and bank balances over a period.
The movement in cash flows is classified into the following segments:
Operating Activities: Represents the cash flow from primary activities of a business.
Investing Activities: Represents cash flow from the purchase and sale of assets other than
inventories (e.g. purchase of a factory plant)
Financing Activities: Represents cash flow generated or spent on raising and repaying
share capital and debt together with the payments of interest and dividends.
Statement of Changes in Equity
Statement of Changes in Equity, also known as the Statement of Retained Earnings,
details the movement in owners' equity over a period. The movement in owners' equity is
derived from the following components:
Net Profit or loss during the period as reported in the income statement
Share capital issued or repaid during the period
Dividend payments
Gains or losses recognized directly in equity (e.g. revaluation surpluses)
Effects of a change in accounting policy or correction of accounting error