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Question:

Explain the difference between accrual accounting and cash accounting. Provide examples of transactions for each method.

Answer:

Accrual accounting records transactions when they are incurred, regardless of when the cash is exchanged. Cash accounting, on the other hand, records transactions only when cash is received or paid. For example, if a company provides services on credit, accrual accounting recognizes revenue when the service is provided, while cash accounting records revenue when the cash is received.

2. Question:

Discuss the concept of depreciation. How does it impact financial statements, and what are the different methods used to calculate depreciation?

Answer:

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It impacts financial statements by reducing the asset's value on the balance sheet and allocating a portion of the cost to the income statement. Common methods include straight-line depreciation, declining balance depreciation, and units-of-production depreciation.

3. Question:

Define the terms "liquidity" and "solvency" in the context of financial analysis. How are these metrics important for assessing a company's financial health?

Answer:

Liquidity refers to a company's ability to meet its short-term obligations, while solvency refers to its ability to meet long-term obligations. Liquidity is crucial for day-to-day operations, and metrics like the current ratio assess it. Solvency, evaluated through metrics like the debt-to-equity ratio, indicates a company's long-term viability and ability to cover long-term debt.

4. Question:

Describe the accounting treatment for goodwill. How is it initially recorded and subsequently tested for impairment?

Answer:

Goodwill is recorded when a company acquires another and represents the excess of the purchase price over the fair value of identifiable net assets acquired. Goodwill is tested for impairment regularly, and if the fair value drops below its carrying amount, impairment is recognized. Impairment losses are reported on the income statement.

5. Question:

Explain the difference between financial accounting and managerial accounting. Provide examples of the types of information each accounting system generates and how they are used by different stakeholders.

Answer:

Financial accounting focuses on providing external stakeholders, such as investors and regulators, with financial information about a company. Managerial accounting, on the other hand, is geared towards internal management and provides information for decision-making. Financial accounting produces financial statements like the income statement and balance sheet, while managerial accounting generates reports such as budget analysis and cost projections for internal use.