Finance 324 Final Exam
The final for this class is organized based up the learning objectives for this class. All of the questions are worth one point. Please be sure to respond to all parts of each question.
Week One – Accounting Principles
Please explain the following accounting concepts and give an example of how they relate to accounting information: Materiality, Consistency, and Full Disclosure.
Materiality principle. Accountants follow the materiality principle, which states that the requirements of any accounting principle may be ignored when there is no effect on the users of financial information. Certainly, tracking individual paper clips or pieces of paper is immaterial and excessively burdensome to any company's accounting department. Although there is no definitive measure of materiality, the accountant's judgment on such matters must be sound. For example, several thousand dollars may not be material to an entity such as Microsoft, but that same figure is quite material to a small, family-owned business.
To be useful, financial information must be relevant, reliable, and prepared in a consistent manner. Consistent information is prepared using the same methods each accounting period, which allows meaningful comparisons to be made between different accounting periods and between the financial statements of different companies that use the same methods.
Full disclosure principle. Financial statements normally provide information about a company's past performance. However, pending lawsuits, incomplete transactions, or other conditions may have imminent and significant effects on the company's financial status. The full disclosure principle requires that financial statements include disclosure of such information. Examples are footnotes supplement financial statements to convey this information and to describe the policies the company uses to record and report business transactions.
What would happen if all of the steps of the accounting cycle were not completed in a specific accounting period? What would be the impact on the company’s balance sheet and net income if a company did not set up a necessary receivable at the end of the accounting period?
Step one of the accounting cycle is to analyze transactions and determine how those transactions affect the accounting equation. Accountants analyze transactions using debits and credits. The second step is record the effects of transactions using journal entries Journal entries are the accountant’s way of recording the debit and credit effects of both simple and complex business transactions. The third step is summarizing the resulting journal entries through posting and prepares a trial balance. Once journal entries are made, their effects must be sorted and copied, or posted, to the individual accounts. The fourth step is to prepare the report. Accounting is designed to accumulate and report in summary form the results of a company’s transactions, thereby transforming the financial data into useful information for decision making.
Some economic activities, such as the growth in the amount of interest a company owes, happen gradually. Without special adjustments, the accounting records would not reflect the impact of these gradual activities. Adjusting entries must be made at the end of each accounting period to ensure that all balance sheet and income statement items are stated at the correct amount.
All businesses, periodically issue their financial statements so that users can make sound economic decisions. Current owners, investors, and bankers, and need up-to-date reports in order to compare and judge a company’s financial position and operating results on a continuing, timely basis. They need to know the financial position of a company (from the balance sheet), the relative success or failure of current operations (from the income statement), and the nature and extent of cash flows (from the statement of cash flows)....
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