Financial objectives, accounts, transactions, related issues
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1. What is the financial objective of financial reporting of external users?
2. For accounting purposes, what is an account? Explain why accounts are used in an accounting system.
3. Define a business transaction in the broad sense, and give an example of two different kinds of transactions.
4. Briefly explain what is meant by transaction analysis. What are the two steps in transaction analysis?
5. What two accounting equalities must be maintained in transaction analysis?
6. How is the current ratio computed and interpreted?
7. What transactions are classified as investing activities in an statement of cash flows? What transactions are classified as financing activities.
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Solution Summary
1. What is the financial objective of financial reporting of external users?
2. For accounting purposes, what is an account? Explain why accounts are used in an accounting system.
3. Define a business transaction in the broad sense, and give an example of two different kinds of transactions.
4. Briefly explain what is meant by transaction analysis. What are the two steps in transaction analysis?
5. What two accounting equalities must be maintained in transaction analysis?
6. How is the current ratio computed and interpreted?
7. What transactions are classified as investing activities in an statement of cash flows? What transactions are classified as financing activities.
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1 - When we perform financial reporting for external users, the objective is to have financial information that is relevant and transparent. The external users are then able to use our information to make investing decisions, including the buying and selling of our company's stock. Financial statements are prepared for external users and through the financial statements, the external users are able to determine the financial health of our company.
2 - An account is where certain transactions are recorded respective to that account. For example, the supplies account contains all debits and credits related to supplies. The accounts receivable account contains a listing of all debits and credits of the A/R activity, which includes charges to the A/R account (which increases the balance because the customer is making a purchase), and credits to the A/R account, which decrease the balance because the customer's payment is credited to the A/R account. Accounts are used in an accounting system to keep the information organized and structured so that our financial statements can be accurately prepared.
3 - Business transactions are activities that take place and are recorded in the appropriate accounting records. A sales transaction would credit the sales account and ...
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