FIN621 MIDTERM SHORT NOTES

SOLVED BY MAHA SHAH

WITH THE HELP OF ABDULLAH VU

1-What Does Notes To The Financial Statements Mean?

Additional information provided in a company's financial statements. Notes to the financial
statements report the details and additional information that are left out of the main reporting
documents, such as the balance sheet and income statement. This is done mainly for the sake of
clarity because these notes can be quite long, and if they were included, they would cloud the data
reported in the financial statements.

2-Financial statements:
It present the results of operations and the financial position of the company. Four statements are
commonly prepared by publicly-traded companies: balance sheet, income statement, cash flow
statement and statement of changes in equity.

3-The Difference Between Accounting and Bookkeeping 

Bookkeeping is an unglamorous but essential part of accounting. It is the recording of all the
economic activity of an organization - sales made, bills paid, capital received - as individual
transactions and summarizing them periodically (annually, quarterly, even daily). Except in the
smallest organizations, these transactions are now recorded electronically; but before computers
they were recorded in actual books, thus bookkeeping.

4-What Does Deferred Account Mean?

An account that postpones tax liabilities until a later date. Deferred accounts are usually
retirement accounts

5-What Does Income Statement Mean?

A financial statement that measures a company's financial performance over a specific accounting
period. Financial performance is assessed by giving a summary of how the business incurs
its revenues and expenses through both operating and non-operating activities. It also shows the
net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.

Also known as the "profit and loss statement" or "statement of revenue and expense".

6-What Does Accrual Accounting Mean?

An accounting method that measures the performance and position of a company by recognizing
economic events regardless of when cash transactions occur. The general idea is that economic
events are recognized by matching revenues to expenses (the matching principle) at the time in
which the transaction occurs rather than when payment is made (or received). This method allows
the current cash inflows/outflows to be combined with future expected cash inflows/outflows to
give a more accurate picture of a company's current financial condition. 

7-What Does Modified Accrual Accounting Mean?

An accounting method commonly used by government agencies that combines accrual-basis
accounting with cash-basis accounting. Modified accrual accounting recognizes revenues when
they become available and measurable and, with a few exceptions, recognizes expenditures when
liabilities are incurred. This system divides available funds into separate entities within the
organization to ensure that the money is being spent where it was intended.

8-What Does Revenue Mean?
The amount of money that a company actually receives during a specific period, including
discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure
from which costs are subtracted to determine net income. 

Revenue is calculated by multiplying the price at which goods or services are sold by the number
of units or amount sold.

Revenue is also known as "REVs".

9-What Does Asset Turnover Mean?

The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales
in dollars by assets in dollars.

Formula:

Also known as the Asset Turnover Ratio.

10-What Does Ratio Analysis Mean?

A tool used by individuals to conduct a quantitative analysis of information in a company's
financial statements. Ratios are calculated from current year numbers and are then compared to
previous years, other companies, the industry, or even the economy to judge the performance of
the company. Ratio analysis is predominately used by proponents of fundamental analysis.

11-What Does Earnings Per Share - EPS Mean?

The portion of a company's profit allocated to each outstanding share of common stock. Earnings
per share serves as an indicator of a company's profitability.

12-What Does Weighted Average Mean?

An average in which each quantity to be averaged is assigned a weight. These weightings
determine the relative importance of each quantity on the average. Weightings are the equivalent
of having that many like items with the same value involved in the average.

13-What Does Cost Of Goods Sold - COGS Mean?

The direct costs attributable to the production of the goods sold by a company. This amount
includes the cost of the materials used in creating the good along with the direct labor costs used
to produce the good. It excludes indirect expenses such as distribution costs and sales force costs.
COGS appears on the income statement and can be deducted from revenue to calculate a
company's gross margin.
Also referred to as "cost of sales". 

14-What Does Operating Income Mean?

The amount of profit realized from a business's operations after taking out operating expenses
- such as cost of goods sold (COGS) or wages - and depreciation. Operating income takes the
gross income (revenue minus COGS) and subtracts other operating expenses and then removes
depreciation. These operating expenses are costs which are incurred from operating activities
and include things such as office supplies and heat and power. Operating Income is typically a
synonym for earnings before interest and taxes (EBIT) and is also commonly referred to as
"operating profit" or "recurring profit". 

Calculated as:

15-What Does Finance Mean?
The science that describes the management of money, banking, credit, investments, and assets

16-What Does Marquee Asset Mean?

A company's most appealing asset. Also referred to as a "trophy asset".

17-What Does Financial Asset Mean?

An asset that derives value because of a contractual claim. Stocks, bonds, bank deposits, and the
like are all examples of financial assets.

18-What Does Liquid Asset Mean?

An asset that can be converted into cash quickly and with minimal impact to the price
received. Liquid assets are generally regarded in the same light as cash because their prices are
relatively stable when they are sold on the open market.

19-What is meant by the adequate disclosure requirements?

An accounting concept that requires the financial statements must include all relevant information
that a reader needs to understand the financial condition and performance of a business.

20-What is the role of an Account Manager in today’s world?

The accounts manager’s role has changed dramatically in recent years. Today’s accounting
manager must be prepared to play a larger role. An Accounts manager must be a planner, leader,
communicator, internal consultant and business partner to senior management.

21-What is difference between Accounts and Accounting?

An account is the record of financial transactions. Accounting is a language of the business, a
system that communicates business information in proper manners. Financial accounting is the
field concerned with the preparation of financial statements for decision makers, such as
stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders.

22-What is meant by accrual accounting?

Accrual accounting means recording and recognizing revenue and expenditure at the time it is
earned or incurred, rather than when money is actually received or paid.

23-What does mean by debit and credit?

Debit means the left hand side of an account. Increase in expense or asset account or a deduction
from a revenue, net worth, or liability account is always debit. Credit means the right hand side.
Decrease in expense or asset account or an increase in revenue, net worth, or liability account is
always credit.

24-What is the difference between general journal and general ledger?

General Journal or simply called journal is the book of original entries used to record financial
transactions in day to day order. Ledger is a book in which the monetary transactions of a
business are posted in the form of debits and credits.

25-What is the prudence concept in accounting?

In accounting Prudence concept means that that the assets or income are not overstated and
liabilities or expenses can not understated.

26-Why depreciation is added back in cash flow statement?

Depreciation is the non cash expense so that it is added back in the cash flow statement.

27-What is difference between long term assets and fixed assets?

Fixed Assets are the assets of permanent nature like machinery, building, vehicles etc.
Depreciation is charged on fixed assets. Long term assets mean the non current assets that are
receivable after 12 months such as long term investments for five years.

28-What is the difference between trial balance and adjusted trial balance?
A trial balance is a list of all the accounts (ledgers) for a period, to “test that the Debits agree with
the Credits”. An adjusted trial balance is the listing of all accounts of a period after adjusting
entries.

29-What is the difference between adjusting entries and closing entries?

Adjusting entries are made at the end of the accounting period before preparing the financial
statements in order to company’s accounting records and financial statements be up-to-date on
the accrual basis of accounting. Closing entries are made after the financial statements are
prepared to close the temporary accounts such as incomes and expenses.

30-Branches of Accounting:
1. Financial Accounting 2. Cost accounting 3. Management accounting 4. Government
accounting

31-What is difference between general ledger and general journal?

When a transaction takes place, it is being recorded in the general journal with the help of the
voucher. After recording in the general journal it is being categorized according to the same
nature of transactions, therefore, is posted to the ledger accounts.

32-What is long term liability and short term liability?

Current liabilities/ short term liabilities: Current liabilities are those liabilities for which you have
to make payment within a relatively shorter period of time- usually not more than 12 months.
Long Term Liabilities: It is an obligation to pay money within a longer period of time i.e. more
than one year.
33-What is the formula of closing stock?
Opening stock xx Add: Purchases xx Direct expenses xx Less: Sales xx Closing stock xx

34-what is accounting cycle?

Accounting cycle: Series of steps in recording an accounting event from the time a transaction
occurs to its reflection in the financial statements; also called bookkeeping cycle. The order of the
steps in the accounting cycle is: recording in the journal, posting to the ledger, preparing a trial
balance, and preparing the financial statements.

35-What are the adjusting entries?

Adjusting entries: There are some accounts in the ledger which do not show their true or correct
balances and they need some adjustments to be made in them. Final statements must show true
position of the business. The trading and profit and loss account (income statement) must contain
all the revenue and expenses relating to the current accounting period. And all the expenses or
revenues relating to the previous year or following period must be deducted. So, before we
prepare final accounts at the end of the accounting period, we need to adjust some of the account
balances in the ledger accounts. These accounts are adjusted by passing adjusted entries. The
purpose of the adjustments is to prepare a perfectly accurate set of Final Accounts for the
accounting period under review, and a perfectly true Balance Sheet as at the present date.

36-What are cost, expenditure and expense?

Cost = total of all kind of expenses consumed to produce a product. Expenditure is a cost incurred
in the normal course of business to generate revenues. Expense is the amount of assets or services
used during a period.

37-What are the bad and doubtful debts?

There are basically three types of debts Good debts are those which are received from the debtor
within due time period. Bad debts are those debts which are not received form the debtor within
given time period and there is no chance to receive them from the debtor. Doubtful debts are
those debts regarding which there is chance to receive them still after due time.

38-What is accumulated depreciation?

Accumulated depreciation is the account for the used life of the asset. Deprecation account is
closed every year and the balance is transferred to the accumulated deprecation account of the
particular asset.
39-what is the difference between in Accounting Equation and Balance Sheet?

Accounting Equation:
ASSETS = LIABILITIES + OWNER’S EQUITY
Accounting Equation shows what a business OWNS and what it OWES.
Balance Sheet:
Balance Sheet is based on Accounting Equation. It is in fact, a detailed statement of the Equation.
A balance sheet reports what a business owns (assets), what it owes (liabilities) and what remains
for the owners (equity) as of a certain date.

40-Explain this equation?

 Dr+↑ assets=liabilities +owner equity

   Cr↓_         cr↑+↓-dr↑ +cr↓_dr
Accounting Equation:
ASSETS = LIABILITIES + OWNER’S EQUITY
Dr (Debit) and Cr (credit)
+↑ (increase) and ↓_ (Decrease)
Increase in assets are debited and decrease in assets are credited
Increase in liabilities and owner equity are credited and decrease in liabilities and Owners
Equity are debited.

41-When owner of the business take the cash away from the business what will be the
entry?

Debit (receive benefit) (owner receive benefit)

Credit (Provide benefit) (cash give benefit)
(Owner wants to take cash or goods out of the business for personal use known as drawing)
DRAWINGS A/C DR
         TO CASH A/C CR

42-When owner of the business take the Goods away from the business then what will be
the entry?

DRAWINGS A/C DR
         To PURCHASES A/C CR

43-What financial statements are same which prepared in all kind of business?

1. Income statement
2. Statement of owners’ equity

3. Balance sheet

4. Statement of cash flows

5. Additional information (financial & non financial) Statement

44-Give one difference in trading concern account heads and manufacturing concern
account heads?

Trading concern account heads:

A trading concern purchases merchandise in a form to sell to customers.
Cost of goods sold = cost of goods consumed + charge paid in bringing the goods in salable
condition

Manufacturing concern account heads:

A manufacturing concern produces goods to be sold.
Cost of goods sold = purchasing of raw material + wages and other expenses for converting raw
material into finished goods

45- Define Partnership act, partnership with its features?

Legal rules for Establishment of partnerships in Pakistan is stated in the Partnership Act, 1932
which defines a partnership in the following terms “Partnership is the relation between persons
who have agreed to share the profits of a business carried on by all or any of them acting for all.”
Features of Partnership:
Legal Entity
Profit and Loss Distribution
Unlimited Liability
Management
Number of Partners

46-Define Joint stock company with its features?

Joint stock company:

A company has some features of corporation and some of partnerships, involving two or more
legal person formed usually for some commercial purposes.
Features of Joint Stock Company
Created by law
Limited Liability
Number of Members
Separate Legal Entity
Transferability of share

47-Give any 3 purposes of Accounting?

The main purpose of financial accounting is to identify financial transactions, organized financial
data into useful information and prepare financial reports that provide information about a firm's
performance to external parties for making intelligent and prudent business decisions.

48-How many Principles and what the names of those come under Generally Accepted
Accounting Principles (GAAP)?

1. Entity Principle
2. Cost principle

3. Going concern assumption

4. Objectivity principle

5. Stable currency principle

6. Adequate disclosure concept

49-What are T-Bills?

T- Bills are the example of Zero Coupon bonds . T- bills are issued by Govt. to finance current
expenditure which are sold by SBP through auctions.

50-What is Cash flow?

Cash flow
 The ability to generate the positive cash flow in future period. , Ability to meet obligations , Co.
need of external financing 
Reasons for difference between the amount of net income and cash flows from operating activity.

FOLLOWING ARE SOME EXTRA QUESTIONS FROM MDB LMS:

An account is the record of financial transactions. 

while

Accounting is a language of the business, a system that communicates business information

in proper manners. Financial accounting is the field concerned with the preparation of
financial statements for decision makers, such as stockholders, suppliers, banks, employees,
government agencies, owners, and other stakeholders.

Accrual accounting means recording and recognizing revenue and expenditure at the time
it is earned or incurred, rather than when money is actually received or paid.

Adjusting entries are made at the end of the accounting period before preparing the
financial statements in order to company’s accounting records and financial statements be
up-to-date on the accrual basis of accounting.
 

Closing entries are  made after the financial statements are prepared to close the temporary
accounts such as incomes and expenses.

Income Statement shows the profitability and balance sheet shows the Financial position on
a particular point.

Debit Balance:

We say that the ledger account has a debit balance when debit side sub-total is greater than
the credit side sub-total. For example Assets have normally debit balance. 

Credit Balance:

 We say that the ledger account has a credit balance when credit side sub-total is greater
than the debit side sub-total for example incomes and liability account has credit balance

Direct Finance 

Any financial transaction in which a borrower and a lender communicate directly and
mutually agree on the terms of a loan without the intervention of the third part ( such as
banks) 

Indirect finance 

A financial transaction through third-party institutions like banks and mutual funds.
Debit Means the left hand side of an account. Increase in expense or asset account or a
deduction from a revenue, net worth, or liability account is always debit. 

Credit Means the right hand side. Decrease in expense or asset account or an increase in
revenue, net worth, or liability account is always credit.

General Journal or simply called journal is the book of original entries used to record
financial record in day to day order. 

Ledger is a book in which the monetary transactions of a business are posted in the form of
debits and credits.

Prudent means using good judgment to consider likely consequences and act accordingly. In
accounting Prudence concept means that that the assets or income are not overstated and
liabilities or expenses can not understated.

Adjusting entries are recorded in order to properly reflect appropriate balances in the
various ledger accounts for a specific accounting period. 

Balance sheet provide the detailed about the assets, liabilities and owners’ equity items that
are used for analysis

Increase in expense is debit (Purchases of material)

and decrease in expense is credit (purchases return) 

Increase of income is credit (for example sales to customer)

and decrease in income is debit (Sales return)

Patent is the right to abstain others for making, using, offering for sale or selling the
invention. 

Copyright is a protection provided to the authors of “original works of authorship”. 

Realization Concept 

It means revenue should be recognized or recorded when the goods are sold or services are
provided/rendered to the customer.

Depreciation is the non cash expense so that it is added back in the cash flow statement.

Long term assets mean the non current assets that are receivable after 12 months 

Fixed Assets are the assets of permanent nature like machinery, building, vehicles etc

Cost which is not incurred but has been paid is called prepaid cost.
 
Post paid is not a term in accounting but generally post paid mean payment after
consumption of services or things.
There are five main heads of accounts that are expense, Income, Assets, Liabilities and
owners’ equity. 

Deferred revenue means unearned revenue. It represents the revenue received in advance
but not earned within the accounting period.

A trial balance is a list of all the accounts (ledgers) for a period, to “test that the Debits
agree with the Credits”.

An adjusted trial balance is the listing of all accounts of a period after adjusting entries.

Owners’ equity is the residual claim on the assets after all liabilities are paid.
 Means Owners’ equity = Assets - Liabilities 

Accrued Expenses are those which have been incurred (we have received the services
during the current year) but yet not paid.

Accrued income refers to revenue that has been incurred but not yet received.

Cash Flow Statement was first introduced and implemented by FASB (Financial
Accounting Standards Board) in 1987 and declared as part of the financial statements. If
you want to know about more in detail about cash flow statement then you can visit the
below site as well. 

http://en.wikipedia.org/wiki/Cash_flow_statement 

Profitability is an ability of a business to generate profit from business. There are some
ratios like ROE, ROA and N.P margin which are used to measure the profitability of
business. 
On the other hand, liquidity is an ability of the business to have assets which can easily be
converted into cash without losing the value.