Accounting test

CMBA 603-S Name ___________________________

Test 1 – part 1 (discussion)

Fall 2021

Discussion – Answer the following questions in your own words – do not copy from the book or notes. Answers should be typed. This is an open-book, open-notes test. You may not use the internet or consult with other people, but you may use our textbook and notes from this class. Both parts of the test are due at midnight, Monday, September 27. Upload your files to Canvas.

1. (a) Explain the difference between the net and gross methods of recording purchases. (b) Explain the difference between the net and gross methods of recording sales. Include in your answers how to account for discounts taken or not taken under each of the methods. Why might the net method be considered theoretically and/or practically better than the gross method (for purchases and for sales)?

2. Discuss “inventory shrinkage” and how it impacts the financial statements.

3. Explain each of the following concepts surrounding accrual accounting and tell how they are related: realization principle, matching principle, accruals, deferrals. Why did the accounting profession decide that accrual accounting was superior to cash accounting for meeting the needs of the primary users of financial statements?

4. Explain the “cost principle” in relation to accounting for assets (chapter 2). What are the pros and cons of this approach?

5. Explain the three parts of the cash flows statement and give two examples of items that would appear in each section.

6. Are debits “good” and credits “bad” in relation to a company’s financial health? Explain.

7. Explain owners’ equity and its subparts for a private company and for a corporation. Theoretically, what can you learn by examining the owners’ equity section of a corporation?

8. Define and differentiate between financial accounting and managerial accounting. Which one is more regulated and why?

9. Define “Generally Accepted Accounting Principles (GAAP).” Do all companies have to follow GAAP? Explain.

10. What is “double entry accounting” and how did it help with the development of business?

11. Are dividends expenses? Why or why not?

12. Define “depreciation” and explain its purpose in financial accounting. If a company forgot to record depreciation for a given year, what parts of the financial statements would be incorrect that year and the following year (if uncorrected)?

13. Discuss the pros and cons of the periodic method and the perpetual method of accounting for inventory.

14. Hypothetically, assume that a company offers its customers terms of 3/10, n/30 for paying bills. What annual rate of interest does this equate to, assuming a 360-day year? Explain your answer and why knowing the annual rate is important for the customers.

15. Define and compare special journals and subledgers. How can they improve the accounting system?

16. In your opinion, which two measures were most informative in the project using the Home Depot annual report? (You may use the ones you submitted or ones that others submitted). Explain why. Also, discuss facts you learned about Home Depot that helped you understand the company’s current or past operating environment.