Revision

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Definition of Accounting

Is a system that identifies, records, and communicates information that

is relevant, reliable, and comparable to help users (internal & external)
to make better decisions.

From the definition, we conclude that accounting includes three basic

activities:

1- Identifying economic events (transactions)

Involves selecting the economic activities relevant to a particular
organization and contains only financial information.
2- Recording (bookkeeping)
Involves recording, classifying, and summarizing the economic events.
3- Communication
✓Involves preparing financial statements (accounting reports) and
communicating it to interested users (internal & external).

MCQ

1. Accountants refer to an economic event as a

a. Purchase

b. Sale

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c. Transaction

d. Change in ownership

2 . The accounting process is correctly sequenced as

a. Identification, communication, recording

b. Recording, communication, identification

c. Identification, recording, communication

d. Communication, recording, identification

3. Which of the following is not a step in the accounting process ?

a. Identification
b. Verification

c. Recording

d. Communication

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 Second
Users of Accounting data

There are two groups of users of financial information:

1) External users: are individuals and organizations outside a

company who wants financial information about the company.

Examples for external users

Investors Use accounting information to make
investing decisions

Creditors Use accounting information to evaluate

the risks of lending money

Taxing Use accounting information to know

authorities whether the company complies with the
tax laws.

Labor unions Want to know whether the owners can pay

increased wages and salaries
Customers To know about the quality of the
company's products

2) Internal users: are those individuals inside a company who plan,

organize, and run the business like finance department, marketing
department, human resources, and management.

Note :There are two types of accounting:

Financial Managerial
Accounting Accounting

Types of reports External reports Internal reports

provided

Users who need External users Internal users

reports

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 MCQ

1. Which of the following is an external user of accounting

information?
a. Labor unions

b. Finance directors

c. Company officers
d. Managers

2. Which one of the following is not an external user of accounting

information?

a. Regulatory agencies

b. Customers
c. Investors

d. All of these answers are external users

3. Financial accounting provides economic and financial information

for all of the following except:

a. Creditors

b. Investors

c. Managers

d. Other external users

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 Answer the Following Questions
MCQ
1. Accountants refer to an economic event as a
a. Purchase
b. Sale
c. Transaction
d. Change in ownership
2. The assets of Enron Company are $270.000 and equity is $90,000.
Liabilities will be
A) $ 60,000.
B) $ 360,000
C) $ 270,000
D) $ 180,000
3. A debt that a business owes to an outside party is called:
A) an asset
B) a liability
C) stockholders' equity.
D) revenue
4. Joe Inc. produces and sells coffee beans. This month it earned $500
by selling coffee beans to Jellery Inc. The $500 received by Joe Inc.is
its
A) revenue
B) equity.
C) gain
D) debt
5 . The owner's claim to the assets of the business is called:
A) return on assets.
B) expenses.
C) equity
D) debt
6. Which of the following is the correct accounting equation?
A) Assets + Liabilities = Equity.

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 B) Assets=Liabilities + Equity
C) Assets + Revenues = Equity
D) Assets + Revenues = Liabilities + Expenses
7. Which of the following is not a step in the accounting process ?
a. Identification
b. Verification
c. Recording
e. Communication

8 . Which type of account is Owner's Capital?

A) equity
B) asset
C) liability
D) revenue
9 . Communication of economic events is the part of accounting process
that involves
a. Identifying economic events
b. Quantifying transactions into dollars and cents
c. Preparing accounting reports
d. Recording and classifying information

10 . The Liabilities of Haney Company are $500.000 and equity is

$350,000. Assets will be
A) $ 850,000.
B) $ 750,000
C) $ 650,000
D) $ 550,000

11. At January 31, 2012, the balance in Aislers Inc.'s supplies account
was $250. During February, Aislers purchased supplies of $300 and
used supplies of $375. At the end of February, the balance in the
supplies account should be

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 a. $175 debit.
b. $325 debit.
c. $175 credit.
d. $325 debit.

True or False
11. Accounting is the information system that measures business
activates, processes the information into reports, and communicates
the results to decision makers
Answer :TRUE
12 . Outside investors would ordinarily use managerial accounting
information to decide whether or not to invest in a business
Answer: FALSE
13. Liabilities are economic resources that are expected to benefit the
business in the future
Answer: FALSE
14 . A payment of an expense in advance is called a prepaid expense.
Answer: TRUE
15. An accounts receivable requires the business to pay cash in future.
Answer: FALSE

16. There are two types of accounting Financial Accounting and

Managerial Accounting
Answer: TRUE
17. The three steps in the accounting process are identification,
recording, and communication.
Answer: TRUE

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 18 . Bookkeeping encompasses all steps in the accounting process.
Answer: FALSE
19 .Accountants prepare, but do not interpret, financial reports.
Answer: FALSE
20 The two most common types of external users are investors and
company officers.
Answer: FALSE

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 Generally Accepted Accounting Principles (GAAP)

The accounting profession has attempted to develop a set of standards that

are generally accepted and universally practiced.

These standards are called Generally Accepted Accounting Principles

(GAAP).

Three organizations are primarily responsible for establishing GAAP:

✓ Securities and Exchange Commission (SEC).

‫هيئة األوراق المالية والبورصات‬
✓ Financial Accounting Standards Board (FASB).
‫مجلس معايير المحاسبة المالية‬
✓ International Accounting Standards Board (IASB).
‫مجلس معايير المحاسبة الدولية‬

Types of organizations

1- Proprietorship.

2- Partnership.

3- Corporation.

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 Proprietorship Partnership Corporation

Owners and Owners and Owners and Owners are

management management are management are separated from
the same the same management

Liability for Unlimited Unlimited Limited liability

owners liability liability

Basic Accounting Equation

Assets = liabilities + owners' equity

1) Assets :
Are resources a business owns. All assets provide future services or
benefits.

Items included in assets:

a. Cash.

b. Account receivable (A/R) I have money with someone and there is no

written promissory note

c. Notes receivable (N/R) I have money with someone and there is a written
promissory note

d. Land.

e. Equipment

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f. Building.

g. Store supplies.

2) Liabilities

Liabilities are claims against assets for creditors - (existing debts and
obligations). Businesses of all sizes usually borrow money and purchase
merchandise on credit and this results in existing debts and obligation
against them.

Items included in liabilities:

a. Accounts payable (AP) I have no money and there is no written

promissory note

b. Notes payable (NP) I have no money and there is a written promissory

note

c. Wages payable

d. Taxes payable

3) Owner's Equity

Owner's equity is the ownership claim on total assets. It is equal to total

assets minus total liabilities.

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Owner's equity divided into 4 components

a) Owner capital (Investments by owner): are the assets the owner puts into
the business. These investments increase owner's equity.

b) Revenues: the increase in owner's equity resulting from business

activities entered into for the purpose of earning income.

a. Common sources of revenue are: sales, fees, services, interest. dividends,

commissions, and rent.

c) Owner Withdrawals: the owner may withdraw cash or other assets for

personal use (decrease owner equity).

d) Expenses: are the costs of assets consumed or services used in the

process of earning revenue (decrease owner equity).

Common expenses are: salaries expense, rent expense, tax expense, etc.

Q: At January 1, 2012, Alligator Industries reported owner's equity of $130,000. During

2012, Alligator had a net loss of $30,000 and owner drawings of $15,000. At December 31,
2012, the amount of owner's equity is

a. $85,000.

b. $100,000.

C . $115,000.

d. $145,000.

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Q : In the first month of operations for Gallowsbird Industries, the total
of the debit entries to the cash account amounted to $9,000 ($4,000
investment by the owner and revenues of $5,000). The total of the credit
entries to the cash account amounted to $5,500 (purchase of equipment
$2,000 and payment of expenses $3,500). At the end of the month, the
cash account has a(n)
a. $1,500 credit balance.

b. $1,500 debit balance.

c. $3,500 debit balance.

d. $3,500 credit balance.

Q: At October 1, 2012, Padilla Industries had an accounts payable

balance of $30,000. During the month, the company made purchases on
account of $25,000 and made payments on account of $36,000. At
October 31, 2012, the accounts payable balance is
a. $19,000

b. $21,000

C. $41,000

d. $91,000

Q: During 2012, its first year of operations, Neko's Bakery had revenues
of $60,000 and expenses of $33,000. The business had owner drawings
of $20,000. What is the amount of owner's equity at December 31, 2012
?
a. $ 0

b. $7,000 credit

c. $27,000 credit

d. $18,000 debit

Q: On July 7, 2012, Hidden Comera Enterprises performed cash services

of $1,700. The entry to record this transaction would include
a. a debit to Service Revenue of $1,700

b. a credit to Accounts Receivable of $1,700

c. a debit to Cash of $1,700.

d. a credit to Accounts Payable of $1,700

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Q: At September 1, 2012, Promise Ping Co. reported owner's equity of
$136,000. During the month, Promise Ring generated revenues of
$38,000, incurred expenses of $21,000, and withdrew cash of $2,000.
What is the amount of owner's equity at September 30, 2012?
a $146,000

b. $151,000

c. $153,000

d. $156,000

Q: If total liabilities increased by $15.000 and owner's equity increased by $10,000 during a
period of time, then total assets must change by what amount and direction during that
same period?

a. $25,000 decrease

b. $5,000 decrease

c. $5,000 increase

d. $25,000 Increase

Q: Before posting a payment of $5,000, the Accounts payable of Chola company had a
normal balance of $18,000. The balance after posting this transaction was:

a. $13,000

b. $5,000

c. $23,000

d. Cannot be determined.

Q. If total liabilities increased by $8,000, then

a. assets must have decreased by $8,000.

b. owner's equity must have increased by $8,000.

c. assets must have increased by $8,000, or owner's equity must have decreased by $8,000

d. assets and owner's equity each increased by $4,000

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Q. As of June 30, 2011, Actual Tigers Company has assets of $100,000 and owner's equity of
$30,000. What are the liabilities for Actual Tigers Company as of June 30, 2011?

a. $30,000

b. $70,000

c. $100,000

d. $130,000

Q. Owner's equity is increased by

a. drawings

b. revenues.

c. expenses.

d. liabilities.

Q. Owner's equity is decreased by

a. assets

b. revenues.

c. expenses.

d. liabilities

Q. The accounting equation for Quattro Enterprises is as follows:

Assets Liabilities Owner's Equity

$120,000 = $60,000 + $60,000

If Quattro purchases office equipment on account for $15,000 , the accounting equation will
change to :

a. $120,000 = $60,000 + $60,000

b. $135,000 = $60,000 + $75,000

c. $135,000 = $67,000 + $67,000

d. $135,000 = $75,000 + $60,000

Q. If total liabilities increased by $17,000 during a period of time and owner's equity
decreased by $6,000 during the same period, then the amount and direction (increase or
decrease) of the period's change in total assets is a(n)

a. $23,000 decrease

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b. $11.000 decrease

c. $11,000 increase

d $23,000 increase

Q. If total liabilities decreased by $15,000 and owner's equity decreased by $10,000 during
a period of time, then total assets must change by what amount and direction during that
same period? + E

A. $25,000 decrease

b. $5.000 decrease

c. $5,000 increase

d. $25,000 increase

Q. If total liabilities decreased by $15,000 and owner's equity increased by $10,000 during a
period of time, then total assets must change by what amount and direction during that
same period?

a $25,000 decrease

b. $5,000 decrease

c. $5,000 increase

d. $25,000 Increase

Q. The final step in the recording process is to

a. analyze each transaction.

b. enter the transaction in a journal

c. prepare a trial balance

d. transfer journal information to ledger accounts

Q. The drawings account

a. appears on the income statement along with the expenses of the business

b. must show transactions every accounting period.

c. is increased with debits and decreased with credits.

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d. is not a proper subdivision of owner's equity.

Q. Which of the following statements is not true?

a. Expenses increase owner's equity

b Expenses have normal debit balances.

c. Expenses decrease owner's equity.

d. Expenses are a negative factor in the computation of net income

Q. Which account below is not a subdivision of owner's equity?

a. Drawings

b. Revenues

c. Expenses

d. Liabilities

Q. An awareness of the normal balances of accounts would help you

spot which of the following as an error in recording?

a. A debit balance in the drawings account

b. A credit balance in an expense account

c A credit balance in a liabilities account

d. A credit balance in a revenue account

Q . Which of the following statements is true?

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a. Debits increase assets and increase liabilities

b. Credits decrease assets and decrease liabilities

c. Credits decrease assets and increase liabilities

d. Debits decrease liabilities and decrease assets.

Q. Assets normally show

a. credit balances.

b. debit balances

c. debit and credit balances.

d. debit or credit balances.

Q. An account will have a credit balance if the

a. credits exceed the debits.

b. first transaction entered was a credit.

c. debits exceed the credits.

d. last transaction entered was a credit.

Q. For the basic accounting equation to stay in balance, each

transaction recorded must
a. affect two or less accounts.

b. affect two or more accounts.

c. always affect exactly two accounts.

d. affect the same number of asset and liability accounts.

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 Financial statements

Financial statements are formal records of the financial activities and

position of a business, organization, or individual. They provide a
summary of an entity's financial performance and position over a specific
period, typically prepared on a quarterly or annual basis. The primary
financial statements include the balance sheet, income statement, statement
of cash flows, and statement of changes in equity.

Here is a brief definition of each:

1. Balance Sheet: Also known as the statement of financial position, the

balance sheet provides a snapshot of an entity's assets, liabilities, and
equity at a specific point in time. It shows what the entity owns and owes,
as well as the amount invested by shareholders.

 Assets: Resources owned by the entity that are expected to bring future
economic benefits.
 Liabilities: Obligations of the entity that are expected to result in an
outflow of economic resources.
 Equity: The residual interest in the assets of the entity after deducting
liabilities, often referred to as net assets.

2. Income Statement: Also known as the profit and loss statement, the
income statement shows the entity's revenues, expenses, and profits or
losses over a specific period. It provides insight into the entity's operational
performance.

 Revenues: Income earned from the entity's core activities.

 Expenses: Costs incurred in the process of earning revenues.
 Net Income: The difference between revenues and expenses, indicating
the entity's profitability.

3. Statement of Cash Flows: This statement reports the entity's cash inflows
and outflows over a specific period. It provides information on how the
entity generates and uses cash through operating, investing, and financing
activities.

 Operating Activities: Cash flows from the entity's main business

activities.

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 Investing Activities: Cash flows from the purchase and sale of long-term
assets and investments.
 Financing Activities: Cash flows related to borrowing, repaying debt, and
transactions with shareholders.

4. Statement of Changes in Equity: This statement shows changes in the

entity's equity over a specific period, including transactions with
shareholders, such as dividends paid and shares issued or repurchased.

 Contributions from Owners: Investments made by shareholders.

 Distributions to Owners: Dividends and other returns to shareholders.
 Retained Earnings: Accumulated profits that have been reinvested in the
entity.

These financial statements provide a comprehensive view of an entity's

financial health, performance, and cash flow dynamics, allowing
stakeholders such as investors, creditors, and management to make
informed decisions.

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