Accounting oral exam questions

ACCOUNTING
● process of identifying, recording and communicating an organisation’s financial
activities
● 2 types; managerial and financial
● 3 types of financial documents; balance sheet, income statement, cash flow
● Non monetary information in footnotes, additional docs, in person
● GAAP principles for accounting ethics

HISTORICAL COST
● One of the GAAP principles
● Recorded in balance sheet
● States that an asset should be recorded at the original cost and not the price it was
bought for
● Applied to fixed assets eg. land, building, equipment and machinery
● Depreciation impacts historical cost (lowering of value of an asset)

FULL DISCLOSURE
● One of the GAAP principles
● Recorded on balance sheet
● Business needs to disclose all important information
● Shows how truthful and ethical a business is
● Shown through financial statements, footnotes, additional doc or in person
● Needs to disclose what principle it is using - GAAP, IFRS, IPSAS
● Auditors - who is verifying the statements
● Contingent assets and liabilities - warranties and income tax
● Depreciation - what caused it
● Intangible assets - how were they valued, who did it etc.
● Taxes out of the norm
● Significant threats

FAIR VALUE
● Current market price of an asset
● Changes slowly
● Reflects intrusive value of an asset
● The opposite of historical cost (explain)
● It is more accurate
 Accounting oral exam questions
● Can be adaptable to all assets and liabilities unlike historical cost

LIABILITY
● Any debts that a company has
● Can be current or non current (explain difference with examples)
● 3 current liabilities; notes payable, accounts payable, unearned revenue (explain)
● It is recorded in balance sheet

WARRANTIES
● Fall under estimated current liabilities
● Fall under unearned revenue - money received for a service yet to be provided
● Obligation for a seller to repair/replace defects
● 2 types; expressed and implied
● Expressed - comes with stipulations
● Implied - online purchases, restaurants

COST STRUCTURE
● Recorded in income statement
● Costs that a business will incur to produce the desired objective of business
● 3 types; variable, fixed and sunk costs
● Fixed - dont vary with output eg. rent
● Variable - vary e.g direct labour
● Sunk - costs already incurred and cannot be reversed eg. training workers

GOODWILL
● Value of a name/brand
● It is an intangible asset
● Only for specific types of businesses
● Eg. for intellectual property, brand recognition etc
● 3 factors; going concern, excess business income, expectation of future economic
benefits

WORKING CAPITAL
● Money used in the day-to-day operations of a business
● Formula = CURRENT ASSETS - CURRENT LIABILITIES
● Current asset and current liability (explain)
 Accounting oral exam questions
● Recorded on balance sheet
● Can be from short term sources eg. short term loan or long term sources eg. retained
profits

ACCOUNTS RECEIVABLE
● Involves revenue recognition principle (explain)
● Promise to be paid by another company
● After invoice is sent out
● Recorded as a current asset in balance sheet
● Example of cash inflow
● Can be problematic if money is not received for long periods

ACCOUNTS PAYABLE
● Involves conservatism principle (explain)
● Promise to pay back another company
● Recorded as a current liability in balance sheet
● Example of cash outflow

ANNUAL REPORT
● A detailed report on a company’s activities during a period of time
● Aimed at external users
● Shows company’s operations and performance
● Components (list some)
● Letter of CEO most important
● Business snapshot; strength, weaknesses, growth, threats
● Trends; CSR, sustainability, diversity, covid

ACCOUNTING PRINCIPLES
● Rules and guidelines that a company must follow when reporting financial info
● 3 types; GAAP (most common and better layout, used in the US), IRFS (dont list
assets in order of liquidity and importance, used by the rest of world), IPSAS (used by
local govt.)
● GAAP 10 principles (list them)
● Importance - comparable, verifiable, universal, understandability, relevant, timeliness

BUSINESS LOSS
 Accounting oral exam questions
● When expenses > earnings
● Recorded in an income statement
● Is temporary
● 3 different types; gross loss, operating loss, net loss
● Causes
● Impacts; business, society, operations, customers

GROSS PROFIT
● Profit a business makes from its core business activities after subtracting all the costs
that are related to manufacturing and selling its product/service
● Also known as ‘gross income’
● Gross profit = NET REVENUE - COST OF GOODS SOLD
● Cost of goods sold: variable costs
● Recorded on an income statement

NET PROFIT
● A company’s profit after subtracting all expenses including taxes
● Also known as ‘net income’
● Net profit = TOTAL REVENUE - TOTAL EXPENSES
● Recorded in income statement
● Shows overall profit

OPERATING PROFIT
● Money left after paying all expenses but before paying tax
● Also known as EBIT (earnings before interest and taxes)
● Operating profit = GROSS PROFIT - OPERATING EXPENSES
● Sometimes also considers depreciation and amortisation
● Depreciation - lowering of value of a fixed asset
● Amortisation - lowering of value of an intangible asset
● Operating profit = GROSS PROFIT - OPERATING EXPENSES - DEPRECIATION -
AMORTISATION

INVENTORY
● Also known as ‘stock’
● Problematic as not all business have the same inventory
 Accounting oral exam questions
● All the raw materials, work in progress and finished goods available for sale that a
company owns
● It is recorded in a balance sheet AND income statement
● In income statement, recorded as cost of goods for unfinished goods and expense for
finished goods
● In balance sheet, recorded as current asset (with historical cost)
● Challenges; theft, damages, shortage, transport, inadequate storage
● Approaches to inventory movement: FIFO and LIFO

UNEARNED REVENUE
● Is a type of liability
● Also known as deferred payment
● Money received for a service/good yet to be provided
● Can be in the form of prepayment (full price) or downpayment (portion of full price)
● Eg. wedding industry, cars, military
● Preferred by businesses because of no interest rates

ESTIMATED CURRENT LIABILITY

● Need to be paid within a year
● Exact amount is unknown
● Eg. warranty and income tax (explain)
● They jointly fall under contingency estimate liability
● 3 types; Probable, reasonably possible and remote

OPERATING CASH FLOW RATIO

● Also known as liquidity ratio
● Measure of how well a business can pay off its current liabilities with money
generated from its core business
● Cash from operations / current liabilities
● Less than 1 - bad
● More than 1 - good