Title: Accounting Basics — LearnCoachAssist

Q: What is accounting?
A: Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to provide useful information for decision-making. It serves as the language of business, helping stakeholders understand financial health.

Q: What are the main branches of accounting?
A: The primary branches are financial accounting, which focuses on external reporting; managerial accounting, for internal decision-making; tax accounting, for compliance with tax laws; and auditing, for verifying financial statements.

Q: Who are the primary users of financial statements?
A: Primary users include investors, creditors, regulators, management, and employees. They use the information to assess profitability, liquidity, solvency, and operational efficiency.

Q: What is GAAP?
A: GAAP stands for Generally Accepted Accounting Principles, a set of standardized guidelines used primarily in the U.S. for preparing financial statements to ensure consistency and comparability.

Q: What is IFRS?
A: IFRS stands for International Financial Reporting Standards, a global framework for financial reporting adopted by many countries to promote transparency and comparability in financial statements.

Q: What is the accounting equation?
A: The accounting equation is Assets = Liabilities + Owner's Equity. It represents the fundamental relationship showing that a company's resources equal claims on those resources.

Q: What is double-entry bookkeeping?
A: Double-entry bookkeeping records each transaction with equal debits and credits to maintain the accounting equation. Every debit must have a corresponding credit, ensuring accuracy and balance.

Q: What are assets?
A: Assets are resources owned or controlled by a business that provide future economic benefits. They are classified as current (e.g., cash, inventory) or non-current (e.g., property, equipment).

Q: What are liabilities?
A: Liabilities are obligations of a business arising from past transactions, representing claims by creditors. They include current liabilities like accounts payable and long-term ones like bonds payable.

Q: What is owner's equity?
A: Owner's equity represents the residual interest in assets after deducting liabilities. It includes owner investments, retained earnings, and accumulated profits.

Q: What is revenue?
A: Revenue is the income earned from normal business operations, such as sales of goods or services. It is recorded when earned under accrual accounting.

Q: What are expenses?
A: Expenses are costs incurred to generate revenue, such as salaries, rent, and utilities. They reduce owner's equity when matched against revenues.

Q: What is a chart of accounts?
A: A chart of accounts is a list of all accounts used by a business to classify transactions. It organizes accounts into categories like assets, liabilities, equity, revenues, and expenses.

Q: What is a journal in accounting?
A: A journal is the book of original entry where transactions are recorded chronologically with debits and credits. It provides a complete audit trail before posting to ledgers.

Q: What is a general ledger?
A: A general ledger is a complete record of all accounts and their balances, summarizing transactions from journals. It forms the basis for financial statements.

Q: What is a trial balance?
A: A trial balance is a list of all ledger accounts with debit and credit balances to verify equality of totals. It detects arithmetic errors but not all mistakes.

Q: What is accrual basis accounting?
A: Accrual basis accounting records revenues when earned and expenses when incurred, regardless of cash flow. It provides a more accurate picture of financial performance than cash basis.

Q: What is cash basis accounting?
A: Cash basis accounting records revenues and expenses only when cash is received or paid. It is simpler but less accurate for matching revenues and expenses.

Q: What is a balance sheet?
A: A balance sheet is a financial statement showing assets, liabilities, and equity at a specific point in time. It reflects the accounting equation in detail.

Q: What is an income statement?
A: An income statement reports revenues, expenses, and net income over a period. It shows profitability: Net Income = Revenues - Expenses.

Q: What is a statement of retained earnings?
A: The statement of retained earnings shows changes in retained earnings over a period, starting with beginning balance, adding net income, subtracting dividends. It links income statement to balance sheet.

Q: What is a cash flow statement?
A: A cash flow statement summarizes cash inflows and outflows from operating, investing, and financing activities. It explains changes in cash balance over a period.

Q: What is depreciation?
A: Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It matches asset cost to periods benefited, reducing taxable income.

Q: What is straight-line depreciation?
A: Straight-line depreciation allocates equal expense each year: (Cost - Salvage Value) / Useful Life. It is simple and widely used for assets with steady utility.

Q: What is FIFO inventory method?
A: FIFO (First-In, First-Out) assumes oldest inventory costs are sold first. It reflects current costs in ending inventory during rising prices.

Q: What is LIFO inventory method?
A: LIFO (Last-In, First-Out) assumes newest costs are sold first. It is allowed under GAAP but not IFRS, often used for tax benefits in inflation.

Q: What are accounts receivable?
A: Accounts receivable are amounts owed to a business by customers for credit sales. They are current assets converted to cash upon collection.

Q: What are accounts payable?
A: Accounts payable are short-term liabilities owed to suppliers for purchases on credit. They represent obligations payable within one year.

Q: What are current assets?
A: Current assets are resources expected to be converted to cash or used within one year, such as cash, receivables, and inventory.

Q: What are non-current assets?
A: Non-current assets, or fixed assets, are long-term resources like property, plant, equipment, and intangibles, used beyond one year.

Q: What is the matching principle?
A: The matching principle requires expenses to be recorded in the same period as related revenues. It ensures accurate profitability measurement.

Q: What is revenue recognition principle?
A: Revenue recognition principle states revenue is recognized when earned and realizable, not necessarily when cash is received. Key criteria include persuasive evidence and delivery.

Q: What is the conservatism principle?
A: Conservatism principle advises understating assets or income and overstating liabilities when uncertainty exists. It promotes prudence to avoid overstating performance.

Q: What is materiality?
A: Materiality refers to information significant enough to influence decisions. Immaterial items may be accounted for differently for efficiency.

Q: What is the going concern assumption?
A: Going concern assumption assumes the business will continue operating indefinitely without liquidation. It justifies capitalizing assets over their useful lives.

Q: What is the monetary unit assumption?
A: Monetary unit assumption states financial transactions are recorded in a stable currency unit, ignoring inflation effects.

Q: What is the economic entity assumption?
A: Economic entity assumption treats the business as separate from owners and other entities. Transactions are recorded distinctly for the entity.

Q: What is the time period assumption?
A: Time period assumption divides business life into artificial periods like quarters or years for reporting. It enables periodic financial statements.

Q: What is the cost principle?
A: Cost principle requires assets to be recorded at historical cost, not market value. It provides objective, verifiable amounts.

Q: What is the full disclosure principle?
A: Full disclosure principle requires all relevant information affecting decisions to be disclosed in financial statements or notes.

Q: What is the current ratio?
A: Current ratio measures liquidity: Current Assets / Current Liabilities. A ratio above 2:1 generally indicates good short-term solvency.

Q: What is the debt-to-equity ratio?
A: Debt-to-equity ratio assesses solvency: Total Liabilities / Owner's Equity. Higher ratios indicate more leverage and risk.

Q: What is gross profit margin?
A: Gross profit margin is (Gross Profit / Revenue) x 100, showing profitability from core operations before overhead.

Q: What is return on equity (ROE)?
A: ROE measures profitability for owners: Net Income / Average Equity x 100. Higher ROE indicates efficient use of equity.

Q: What is the accounting cycle?
A: Accounting cycle is the process from recording transactions to preparing financial statements: journalize, post, trial balance, adjustments, adjusted trial balance, statements, closing, post-closing trial balance.

Q: What are adjusting entries?
A: Adjusting entries update accounts at period-end for accruals, deferrals, depreciation. They ensure accrual accounting and proper matching.

Q: What are closing entries?
A: Closing entries transfer temporary accounts (revenues, expenses, dividends) to retained earnings at period-end. They reset accounts for the next period.

Q: What is a post-closing trial balance?
A: Post-closing trial balance lists only permanent accounts (assets, liabilities, equity) after closing. It verifies debits equal credits for new period start.

Q: What is an accounting worksheet?
A: An accounting worksheet is a multi-column tool aiding adjustments and statement preparation. It includes trial balance, adjustments, and statement columns for verification.

Q: What is bank reconciliation?
A: Bank reconciliation reconciles company cash records with bank statement, identifying timing differences, errors, or theft. It ensures accurate cash balances.

Q: What is a debit in double-entry bookkeeping?
A: A debit is an entry on the left side of an account. It increases assets, expenses, and dividends, and decreases liabilities, equity, and revenue. Every debit has a matching credit.

Q: What is a credit in double-entry bookkeeping?
A: A credit is an entry on the right side of an account. It increases liabilities, equity, and revenue, and decreases assets and expenses. It always offsets a debit in the same transaction.

Q: What are the normal balances of asset accounts?
A: Asset accounts normally carry a debit balance. Cash, Accounts Receivable, Inventory, and Equipment all increase with debits and decrease with credits.

Q: What are the normal balances of liability accounts?
A: Liability accounts normally carry a credit balance. Accounts Payable, Loans Payable, and Accrued Expenses all increase with credits and decrease with debits.

Q: What is a T-account?
A: A T-account is a visual representation of a ledger account shaped like the letter T, with debits on the left and credits on the right. It is used to teach and analyze the effect of journal entries.

Q: What is a compound journal entry?
A: A compound journal entry involves more than two accounts but still maintains equal debits and credits. For example, one transaction may debit several expense accounts and credit one cash account.

Q: What is a contra-asset account?
A: A contra-asset account carries a balance opposite to its related asset. Accumulated Depreciation reduces Property, Plant & Equipment, and Allowance for Doubtful Accounts reduces Accounts Receivable.

Q: What is net book value?
A: Net book value (carrying amount) is an asset's original cost minus its accumulated depreciation. It represents the un-depreciated portion remaining on the balance sheet at a given date.

Q: What is the difference between depreciation expense and accumulated depreciation?
A: Depreciation expense is the amount charged in a single period and reported on the income statement. Accumulated depreciation is the running total of all depreciation recorded to date and is a contra-asset on the balance sheet.

Q: What is the units-of-production depreciation method?
A: Units-of-production depreciation allocates cost based on actual usage: (Cost - Salvage) x (Units this period / Total estimated units). It suits assets whose wear is tied directly to output, like machinery.

Q: What is the double-declining-balance depreciation method?
A: Double-declining-balance is an accelerated method that multiplies straight-line rate by 2 and applies it to the asset's beginning book value. Salvage value is ignored until book value reaches it.

Q: What is salvage value?
A: Salvage value is the estimated amount a company expects to recover from disposing of an asset at the end of its useful life. It is subtracted from cost in straight-line and units-of-production depreciation.

Q: What is a fixed asset?
A: A fixed asset (PP&E) is a long-term tangible asset used in operations, not held for resale. Examples include buildings, machinery, vehicles, and land improvements. Land is not depreciated.

Q: What is capitalizing vs. expensing a cost?
A: Capitalizing records a cost as an asset on the balance sheet and depreciates it over time. Expensing records the cost immediately on the income statement. Material long-term benefits generally require capitalization.

Q: What are intangible assets?
A: Intangible assets are long-term non-physical resources with future economic value. They include patents, trademarks, copyrights, goodwill, and software. Some have finite lives (amortized); goodwill and many trademarks are indefinite-lived.

Q: What is goodwill?
A: Goodwill is an intangible asset representing the premium paid over fair value for an acquired business. It arises from reputation, customer relationships, and synergies, and is tested annually for impairment.

Q: What is impairment?
A: Impairment is a write-down of an asset's carrying value when its fair value has fallen below book value and the decline is other-than-temporary. The loss appears on the income statement.

Q: What is depreciation recapture?
A: Depreciation recapture is a tax concept where gains on the sale of a depreciable asset are taxed as ordinary income up to the amount of depreciation taken. Section 1245 in the U.S. governs most personal property recapture.

Q: What is the difference between periodic and perpetual inventory systems?
A: Perpetual systems update inventory records continuously with each purchase and sale. Periodic systems update inventory only at period end via a physical count. Perpetual provides more timely information for COGS.

Q: What is cost of goods sold (COGS)?
A: COGS is the direct cost of inventory sold during a period: Beginning Inventory + Purchases - Ending Inventory. It is a major expense on the income statement for retailers, manufacturers, and wholesalers.

Q: What is the weighted-average inventory method?
A: Weighted-average assigns the same unit cost to all items, recalculated each period as (Total cost of goods available) / (Total units available). It smooths price fluctuations between FIFO and LIFO results.

Q: What is the specific identification method?
A: Specific identification tracks the actual cost of each individual item sold. It is precise but practical only for unique, high-value items like cars, jewelry, or custom goods.

Q: How does FIFO affect the balance sheet during inflation?
A: Under FIFO, the oldest (cheapest) costs flow to COGS, leaving the most recent (higher) costs in ending inventory. The balance sheet therefore reflects more current replacement values, increasing reported inventory and net income.

Q: How does LIFO affect net income during inflation?
A: Under LIFO, the newest (higher) costs flow to COGS, matching current costs against current revenue. This lowers net income and reduces taxes in inflationary periods.

Q: What is the LIFO reserve?
A: The LIFO reserve is the cumulative difference between inventory reported under FIFO and under LIFO. Companies disclose it in notes to help users convert LIFO results to FIFO for comparability.

Q: What is LIFO liquidation?
A: LIFO liquidation occurs when a company sells more inventory than it buys, dipping into older, cheaper LIFO layers. This shifts older costs into COGS, often raising reported income in inflationary periods.

Q: What is the lower of cost or net realizable value (LCNRV) rule?
A: LCNRV requires inventory to be reported at the lower of its historical cost or its net realizable value (selling price minus completion and selling costs). It applies conservatism by preventing overstatement.

Q: What is gross profit?
A: Gross profit is Revenue minus COGS. It measures profit from core operations before operating expenses, interest, and taxes. It is a key indicator of pricing and production efficiency.

Q: What is operating income?
A: Operating income is Gross Profit minus operating expenses (selling, general, and administrative). It reflects earnings from core business activities, excluding interest and taxes. Also called EBIT in some definitions.

Q: What is EBIT vs. EBITDA?
A: EBIT is Earnings Before Interest and Taxes. EBITDA is EBIT plus Depreciation and Amortization. EBITDA is often used as a proxy for cash flow and to compare capital-intensive firms.

Q: What is net income?
A: Net income is the bottom-line profit: total revenues minus total expenses, including taxes and interest. It increases retained earnings and is the basis for earnings per share.

Q: What is earnings per share (EPS)?
A: EPS is Net Income attributable to common shareholders divided by weighted-average common shares outstanding. Basic EPS uses only common shares; diluted EPS also includes the effect of convertibles and options.

Q: What is working capital?
A: Working capital is Current Assets minus Current Liabilities. It measures short-term liquidity and the cushion available to fund operations. Positive working capital signals operational health.

Q: What is the quick ratio?
A: Quick ratio is (Cash + Marketable Securities + Receivables) / Current Liabilities. It excludes inventory and prepaid expenses to test immediate liquidity. A ratio above 1.0 is generally considered healthy.

Q: What is the cash ratio?
A: Cash ratio is (Cash + Cash Equivalents) / Current Liabilities. It is the most conservative liquidity measure, showing ability to pay current debts with cash on hand.

Q: What is the operating cash flow ratio?
A: Operating cash flow ratio is Cash Flow from Operations divided by Current Liabilities. It measures ability to pay short-term obligations from actual cash generated by operations, not just accounting accruals.

Q: What is days sales outstanding (DSO)?
A: DSO is Average Accounts Receivable divided by (Net Credit Sales / 365). It is the average number of days to collect cash after a sale. Lower DSO means faster collection.

Q: What is days inventory outstanding (DIO)?
A: DIO is (Average Inventory / COGS) x 365. It is the average number of days inventory sits before being sold. Lower DIO indicates faster inventory movement.

Q: What is days payable outstanding (DPO)?
A: DPO is (Average Accounts Payable / COGS) x 365. It is the average number of days a company takes to pay suppliers. Higher DPO preserves cash but may risk supplier relationships.

Q: What is the cash conversion cycle (CCC)?
A: CCC measures the time between paying for inputs and collecting cash from customers: DIO + DSO - DPO. A shorter cycle frees up working capital and improves liquidity.

Q: What is return on assets (ROA)?
A: ROA is Net Income divided by Average Total Assets, expressed as a percentage. It measures how efficiently assets produce profit. Lower ROA in asset-heavy industries is normal.

Q: What is the net profit margin?
A: Net profit margin is Net Income divided by Revenue. It indicates the percentage of revenue kept as profit after all expenses, including taxes and interest.

Q: What is the interest coverage ratio?
A: Interest coverage is Operating Income (EBIT) divided by Interest Expense. It measures ability to pay interest on outstanding debt. A ratio below 1.5 signals potential solvency problems.

Q: What is the P/E ratio?
A: The price-to-earnings ratio is Market Price per Share divided by EPS. It shows how much investors pay for $1 of current earnings. High P/E signals growth expectations or overvaluation.

Q: What is book value per share?
A: Book value per share is Total Stockholders' Equity divided by Shares Outstanding. It represents the per-share claim on net assets if the company were liquidated at book value.

Q: What is retained earnings?
A: Retained earnings are cumulative net income retained in the business rather than distributed as dividends. They appear in equity and fund growth, debt repayment, or share buybacks.

Q: What is the retained earnings formula?
A: Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends Declared. Net losses and prior-period adjustments also reduce the balance.

Q: What is the difference between cash dividends and stock dividends?
A: Cash dividends pay shareholders in cash and reduce assets. Stock dividends issue additional shares and transfer value from retained earnings to contributed capital; they do not change total equity.

Q: What is a stock split?
A: A stock split increases the number of shares outstanding by issuing additional shares proportionally, while reducing the per-share price. Total market value and equity remain unchanged.

Q: What are temporary accounts?
A: Temporary accounts are revenues, expenses, and dividends. They accumulate activity for one period and are closed to retained earnings at period end, starting each new period with zero balance.

Q: What are permanent accounts?
A: Permanent accounts are assets, liabilities, and equity. Their balances carry forward from one period to the next and are not closed at period end.

Q: What are accruals in accounting?
A: Accruals are adjusting entries for revenues earned but not yet received (accrued revenue) or expenses incurred but not yet paid (accrued expense). They ensure proper period matching under accrual accounting.

Q: What is a deferral?
A: A deferral is an adjusting entry for cash received or paid before revenue is earned or expense is incurred. Examples include prepaid insurance and unearned rent. They shift recognition to the correct period.

Q: What is unearned revenue?
A: Unearned revenue is a liability for cash collected before goods or services are delivered. As the obligation is fulfilled, an adjusting entry converts it into earned revenue.

Q: What is the difference between an adjusting entry and a closing entry?
A: Adjusting entries update account balances to reflect accruals and deferrals before statements. Closing entries zero out temporary accounts and transfer their net balances to retained earnings.

Q: What are the four types of adjusting entries?
A: The four types are: (1) prepaid expenses, (2) unearned revenues, (3) accrued expenses, and (4) accrued revenues. They ensure revenues and expenses appear in the correct period.

Q: What is a reversing entry?
A: A reversing entry is an optional entry made at the start of a new period that reverses a prior period's accrual. It simplifies bookkeeping by letting routine transactions be recorded normally.

Q: What is a fiscal year?
A: A fiscal year is a 12-month accounting period that may end on any date, not necessarily December 31. Many retailers use a 52/53-week fiscal year ending on a Saturday closest to month-end.

Q: What is the difference between financial accounting and managerial accounting?
A: Financial accounting produces standardized external reports for investors and creditors. Managerial accounting provides internal, often non-GAAP reports for planning, controlling, and decision-making.

Q: What is contribution margin?
A: Contribution margin is Sales minus Variable Expenses. It is the amount available to cover fixed costs and contribute to profit. Per-unit contribution margin guides pricing and product mix decisions.

Q: What is break-even point?
A: Break-even point is the sales volume at which total revenue equals total costs: Fixed Costs / Contribution Margin per Unit. Above it the business operates profitably; below it, at a loss.

Q: What is variable costing?
A: Variable costing expenses only variable production costs (direct materials, direct labor, variable overhead) as inventory costs. Fixed manufacturing overhead is expensed in the period incurred. It is used internally, not for GAAP external reporting.

Q: What is absorption costing?
A: Absorption costing expenses all production costs (variable and fixed) as inventory costs. Fixed overhead is capitalized in inventory until sold. GAAP requires absorption costing for external reports.

Q: What are the three sections of a cash flow statement?
A: Operating activities, investing activities, and financing activities. Operating shows core cash from the business; investing covers long-term assets; financing covers debt and equity transactions.

Q: What is the indirect method of cash flow?
A: The indirect method starts with net income and adjusts for non-cash items (depreciation) and changes in working capital to derive operating cash flow. It is the most commonly used format.

Q: What is free cash flow?
A: Free cash flow is Operating Cash Flow minus Capital Expenditures. It represents cash available to expand the business, pay dividends, reduce debt, or buy back shares.

Q: What is the Sarbanes-Oxley Act (SOX)?
A: SOX is a 2002 U.S. law that strengthened corporate governance and internal controls over financial reporting. It requires CEOs and CFOs to certify financial statements and auditors to attest to internal controls.

Q: What is internal control?
A: Internal control is a system of policies, procedures, and safeguards designed to ensure reliable financial reporting, effective operations, and compliance with laws. The COSO framework defines five components.

Q: What is segregation of duties?
A: Segregation of duties is an internal control that splits responsibilities for authorizing, recording, and reconciling transactions among different people. It reduces fraud and error risk.

Q: What is an unqualified opinion?
A: An unqualified (clean) opinion is issued when financial statements are presented fairly in all material respects and conform with GAAP. It is the most favorable audit opinion.

Q: What is a qualified opinion?
A: A qualified opinion contains a specific exception or departure from GAAP that is material but not pervasive. Users should treat the financial statements with caution in the affected area.

Q: What is an adverse opinion?
A: An adverse opinion is issued when financial statements are materially misstated and the misstatements are both material and pervasive. It signals the statements are not fairly presented.

Q: What is the historical cost principle?
A: Historical cost requires assets to be recorded at the cash or cash-equivalent amount paid at acquisition. It is objective and verifiable, but can become outdated in inflationary environments.

Q: What is fair value?
A: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. It is the basis for mark-to-market accounting.

Q: What is mark-to-market accounting?
A: Mark-to-market revalues certain assets and liabilities to current market prices, with changes flowing through income or equity. It is required for trading securities and used for derivatives.

Q: What is a deferred tax asset?
A: A deferred tax asset arises when taxable income is higher than book income due to temporary differences, or when carryforwards exist. It represents future tax savings and is recorded if more likely than not realizable.

Q: What is a deferred tax liability?
A: A deferred tax liability arises when book income is higher than taxable income, creating a future tax payment obligation. Accelerated tax depreciation is a common cause.

Q: What is a temporary difference?
A: A temporary difference is a difference between the book carrying amount of an asset or liability and its tax basis that will reverse in future periods. It produces deferred tax assets or liabilities.

Q: What is the effective tax rate?
A: The effective tax rate is Income Tax Expense divided by Pre-Tax Income, expressed as a percentage. It often differs from the statutory rate due to permanent differences and credits.

Q: What is FICA?
A: FICA is the U.S. Federal Insurance Contributions Act tax, which funds Social Security and Medicare. It has two components: OASDI (6.2% on wages up to an annual limit) and Medicare (1.45% on all wages).

Q: What is the percentage-of-completion method?
A: Percentage-of-completion recognizes revenue on long-term contracts in proportion to costs incurred relative to total estimated costs. It is required when estimates are reliable and collections are assured.

Q: What is the completed-contract method?
A: Completed-contract defers all revenue and expense recognition until the contract is finished. It is used when estimates are unreliable but allowed only in limited cases under GAAP.

Q: What is a contingent liability?
A: A contingent liability is a potential obligation dependent on a future event, such as pending litigation or product warranties. It is recorded only if the loss is probable and reasonably estimable; otherwise it is disclosed.

Q: What is bad debt expense?
A: Bad debt expense is the cost of customer receivables deemed uncollectible. Under the allowance method, it is estimated and recorded in advance; under the direct write-off method, it is recognized only when a specific account is written off.

Q: What is the allowance for doubtful accounts?
A: The allowance for doubtful accounts is a contra-asset that estimates uncollectible receivables. It is subtracted from Accounts Receivable on the balance sheet to show net realizable value.

Q: What is the direct write-off method?
A: The direct write-off method records bad debt expense only when a specific account is determined to be uncollectible. It is simple but violates the matching principle, so GAAP prefers the allowance method.

Q: What is the aging of receivables?
A: An aging of receivables groups outstanding invoices by age (0-30, 31-60, 61-90, over 90 days) to estimate uncollectible amounts. Older balances are assigned higher bad-debt probabilities.

Q: What is a bond?
A: A bond is a long-term debt security issued by corporations or governments to raise capital. Bondholders receive periodic interest payments and the face value at maturity.

Q: What is a bond discount?
A: A bond discount occurs when bonds are issued for less than face value, typically when the stated (coupon) rate is below the market rate. The discount is amortized to interest expense over the bond's life.

Q: What is the effective interest method?
A: The effective interest method calculates interest expense by multiplying the bond's carrying value by the market (effective) rate at issuance. The difference between this and the cash interest payment is the discount or premium amortization.

Q: What is a change in accounting estimate?
A: A change in accounting estimate arises from new information or experience, such as revising an asset's useful life. It is applied prospectively, affecting current and future periods, with no restatement of prior statements.

Q: What are discontinued operations?
A: Discontinued operations are gains or losses from the sale or abandonment of a major component of the business. They are reported separately on the income statement, net of tax, below income from continuing operations.

Q: What is other comprehensive income (OCI)?
A: OCI includes revenues, expenses, gains, and losses that bypass the income statement and are recorded directly in equity. Examples: unrealized gains/losses on AFS securities, foreign currency translation, pension adjustments.

Q: What is a related-party transaction?
A: A related-party transaction is a deal between the reporting entity and a party with the ability to influence the entity, such as owners, executives, or affiliates. Disclosure is required because arm's-length terms may not apply.

Q: What is the role of the Financial Accounting Standards Board (FASB)?
A: The FASB is the U.S. private-sector body that sets GAAP for public and private companies. It issues Accounting Standards Codification (ASC) updates through due process.

Q: What is the role of the Securities and Exchange Commission (SEC)?
A: The SEC is the U.S. regulator overseeing securities markets. It requires public companies to file periodic reports (10-K, 10-Q, 8-K) and has authority to set reporting requirements, though GAAP is set by FASB.

Q: What is ASC 606?
A: ASC 606 is the revenue recognition standard that uses a five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate the price, and recognize revenue when obligations are satisfied.

Q: What is the difference between GAAP and IFRS?
A: GAAP is rules-based and used in the U.S. IFRS is principles-based and used in most other countries. Key differences include LIFO prohibition under IFRS, inventory valuation methods, and development cost treatment.

Q: What is the difference between common stock and preferred stock?
A: Common stock carries voting rights and residual dividend claims. Preferred stock typically has priority in dividends and liquidation but usually no voting rights; it often has a fixed dividend.

Q: What is treasury stock?
A: Treasury stock is shares that a company has issued and then reacquired, held in the corporation's treasury. It is recorded at cost as a contra-equity account, reducing total stockholders' equity.

Q: What is additional paid-in capital?
A: Additional paid-in capital is the amount paid by investors above the par value of stock. It is a component of paid-in capital and reflects premiums received from share issuances.

Q: What is the economic order quantity (EOQ)?
A: EOQ is the optimal order quantity that minimizes total inventory costs (ordering plus holding). Formula: sqrt(2DS/H), where D is annual demand, S is ordering cost, and H is holding cost per unit.

Q: What is activity-based costing (ABC)?
A: ABC assigns overhead costs to products or services based on the activities they consume. It provides more accurate cost information than volume-based allocation, especially for diverse product lines.

Q: What is a flexible budget?
A: A flexible budget adjusts the original budget to the actual level of activity. It separates fixed and variable costs, allowing fair performance evaluation at different sales volumes.

Q: What is variance analysis?
A: Variance analysis compares actual results to budgeted figures and breaks the difference into causes such as price, volume, and efficiency variances. It pinpoints where management attention is needed.

Q: What is the break-even formula in units?
A: Break-even units = Total Fixed Costs / (Sales Price per Unit - Variable Cost per Unit). Each unit above break-even contributes profit equal to its contribution margin.

Q: What is the margin of safety?
A: Margin of safety is Actual or Budgeted Sales minus Break-even Sales. It shows how much sales can drop before the company incurs a loss. Expressed as a percentage of actual sales, it is a risk measure.

Q: What is horizontal analysis?
A: Horizontal analysis compares financial statement line items across multiple periods, often expressed as percentage changes. It reveals trends in revenue, expenses, and balance sheet items.

Q: What is vertical analysis?
A: Vertical analysis expresses each financial statement item as a percentage of a base figure (revenue for the income statement, total assets for the balance sheet). It reveals the structure of the business.

Q: What is the equity method of accounting?
A: The equity method records the investor's proportional share of the investee's net income as investment revenue, with a corresponding increase in the investment account. Dividends reduce the investment account, not income. Used for significant influence (typically 20-50% ownership).

Q: What is the consolidation principle?
A: Consolidation combines the financial statements of a parent and its majority-owned subsidiaries as if they were one entity. Intercompany balances and transactions are eliminated in consolidation.

Q: What is a non-controlling interest?
A: Non-controlling interest is the portion of a subsidiary's equity not attributable to the parent. It appears separately in consolidated equity and as a separate line of net income disclosure.

Q: What is the difference between IFRS and GAAP in inventory valuation?
A: IFRS prohibits LIFO and requires inventory at the lower of cost and net realizable value. GAAP allows LIFO and uses lower of cost or market (now largely LCNRV under ASU 2015-11) for inventories.

Q: What is the difference between IFRS and GAAP in development costs?
A: IFRS allows capitalization of development costs once technical and commercial feasibility is established. GAAP requires most research and development costs to be expensed as incurred, with limited exceptions for software.

Q: What is the difference between IFRS and GAAP in fixed asset revaluation?
A: IFRS allows fixed assets to be revalued to fair value, with changes flowing through OCI or income. GAAP generally requires fixed assets to remain at historical cost.

Q: What is the difference between an asset and an expense?
A: An asset provides future economic benefit and appears on the balance sheet. An expense is a cost consumed in the current period and appears on the income statement. Capitalizing creates an asset; expensing recognizes it immediately.

Q: What is a constructive obligation?
A: A constructive obligation is an obligation created by established patterns of past practice or published policies that lead others to expect the entity will discharge it. Even without a legal contract, it is recognized as a liability.

Q: What is prime costs?
A: Prime costs are Direct Materials plus Direct Labor. They are the most directly traceable costs of producing a product and exclude manufacturing overhead.

Q: What are conversion costs?
A: Conversion costs are Direct Labor plus Manufacturing Overhead. They represent the cost of converting raw materials into finished goods.

Q: What is a tax shield?
A: A tax shield is a reduction in taxable income that lowers tax owed. Common shields include depreciation, interest expense, and certain operating expenses. Value equals the tax rate times the deductible amount.