Accounting Fundamentals Flashcards

Which accounting equation correctly represents the relationship between assets, liabilities, and equity?

Answer: Assets = Liabilities + Equity

The fundamental accounting equation states that Assets equal Liabilities plus Owner's Equity, reflecting that all assets are financed by either debt or equity.

Which financial statement shows a company's revenues and expenses over a specific period?

Answer: Income Statement

The Income Statement (also called the Profit and Loss Statement) reports revenues, expenses, and net income or loss over a defined accounting period.

Under accrual accounting, revenue is recognized when:

Answer: It is earned, regardless of when cash is received

Accrual accounting requires revenue to be recognized when it is earned (i.e., goods delivered or services rendered), not when cash is collected.

Depreciation is best described as:

Answer: The allocation of an asset's cost over its useful life

Depreciation systematically allocates the cost of a tangible long-term asset across its estimated useful life, matching the expense to the periods it benefits.

Which inventory costing method assumes the most recently purchased items are sold first?

Answer: LIFO (Last In, First Out)

LIFO assumes the last (most recently purchased) items are the first to be sold, which can lower taxable income during periods of rising prices.

A debit entry to an asset account will:

Answer: Increase the asset balance

Under double-entry bookkeeping, debits increase asset account balances because assets carry a normal debit balance.

Which of the following is an example of a current liability?

Answer: Accounts payable

Accounts payable are obligations due within one year (or one operating cycle) and are therefore classified as current liabilities on the balance sheet.