Fundamental Accounting Equation quiz #1 Flashcards
Fundamental Accounting Equation quiz #1
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What is the fundamental accounting equation?
The fundamental accounting equation is Assets = Liabilities + Equity. How are assets classified in accounting?
Assets are classified as current assets (convertible to cash within one year) and long-term assets (used for more than one year). What are examples of current assets?
Examples of current assets include cash, accounts receivable, and inventory. What are examples of long-term assets?
Examples of long-term assets include land, machinery, and buildings. How are liabilities categorized?
Liabilities are categorized as current liabilities (due within one year) and long-term liabilities (due after one year). What are examples of current liabilities?
Examples of current liabilities include accounts payable and short-term debt. What are examples of long-term liabilities?
Examples of long-term liabilities include long-term loans and bonds. What is equity in the context of the accounting equation?
Equity represents the owners' claims on the assets of the business, including initial capital and retained earnings. What are the main components of equity?
The main components of equity are paid-in capital and retained earnings. What is paid-in capital?
Paid-in capital is the amount of money invested in the company by its owners. What are retained earnings?
Retained earnings are profits from previous years that have not been distributed as dividends but are reinvested in the business. How are revenues and expenses related to equity?
Revenues and expenses affect the current year's net income, which is added to retained earnings, a component of equity. What is the difference between revenue and income?
Revenue is the total inflow of resources, while income (or profit) is revenue minus expenses. Are dividends considered an expense?
No, dividends are not an expense; they are payments to shareholders from retained earnings. How is net income or loss calculated?
Net income or loss is calculated as revenue minus expenses. What is the significance of the one-year cutoff in classifying assets and liabilities?
The one-year cutoff distinguishes current assets and liabilities (due or convertible within one year) from long-term ones (used or due after one year). How does a company finance its assets?
A company finances its assets through liabilities (money owed to others) and equity (owners' investment and retained earnings). What happens to retained earnings when dividends are paid?
When dividends are paid, they are deducted from retained earnings. Why is it important to distinguish between revenue and income in accounting?
It's important because revenue is the total inflow, while income reflects the net result after deducting expenses, showing true profitability. What does the accounting equation reveal about a company's financial position?
The accounting equation shows that a company's assets are financed by either liabilities or equity, reflecting its financial structure.
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